There’s no way around it – rejection hurts. And a personal loan rejection is no different. It can leave you feeling confused, ashamed and insulted. Being denied a small business loan may seem like an attack to your credibility if you thought you’d get approved.

Don’t know what to do after being denied a small business loan? Rather than feeling dejected, take hold of your emotions and take steps to better your business financial situation.

5 Steps to Take After You Have Been Denied a Small Business Loan

1. Ask for an explanation letter from the loan provider.

The lender needs to give you a written letter as to why your application was rejected. If the lender has not yet given the letter to you, request for it. The explanation given in the letter can help you identify the reason for your loan rejection and help you take care of specific concerns before you get finance again in the future.

2. Request for your personal credit reports as well as your business.

Do you know that your personal credit score affects your chances of getting a small business loan? Therefore, you need to review your personal credit report and score to check for any errors, inaccurate information or collections accounts that may have contributed to the loan rejection.

Ensure that you pull up your credit report from all the major credit bureaus – CIBIL, Experian, and Equifax – as different bureaus may have different information registered about your credit profile. If you find some discrepancies or errors, immediately raise a dispute with the credit bureau and get it corrected.

Your business is also reported to the credit bureaus. That means it has its own credit score and credit report. The most common reason for small business loan denial stems from poor cash flow, especially if your business is new and you do not have a credit history.

To build your business credit, ask your vendors, creditors (if any), and even landlord of your office property to report your payment history to the credit bureaus.

3. Work upon improving your business’s financial standing.

Your business and personal credit scores influence the lender’s decision to a large extent. However, there are other crucial aspects of your business that are considered while determining the small business loan eligibility, and they are –

• Your annual revenue,

• Business savings, and

• Cash flow

Take a look at the above factors from the lender’s point of view and then work on improving your business financial standing. Lenders look at your creditworthiness and, based on it, decide if are eligible.

One of the tools lenders use to access your creditworthiness is Debt service coverage ratio (DSCR). Using DSCR, lenders review your business cash flow to determine whether you have the required cash flow to make consistent loan repayments.

The formula of DSCR:

DSCR = Net operating income / Total debt service

A debt service ratio of less than 1 suggests that your cash flow is not enough to cover the business debt. Hence, your loan will be denied.

A DSCR of more than 1 suggests that your business has enough income to pay off your current debt obligations and also the fresh loan. So, your small business loan application may be approved.

If you have been denied loan due to low DSCR score, it may not be possible for you to quickly reduce your business expenses, pay off the debts and reapply. In such a situation, it is better to apply for a lower amount of funds in the beginning until your business is in better financial standing.

4. Consider alternative loan options.

A loan denial from one lender doesn’t mean you are not creditworthy for a different type of a loan elsewhere. The requirements of different loan products are different. You may have been denied a small business loan by a traditional bank; however, you can apply for a personal loan from new-age online lending platforms and get the finance you need for your business. Explore your options, you may find a loan product with lower interest rates, which may be more suitable for your needs than a small business loan.

5. Be cautious while reapplying.

You may have overcome your business credit challenges and are ready to reapply for a small business loan. You could make simple mistakes in your business loan application that can be a reason good enough to get your loan application denied yet again.

This quick checklist will help you reapply for a small business loan correctly:

• Do you have all the relevant documents?

• Did you check your information and all aspects of the application form for accuracy?

• Do your business balance sheet and P&L statements match the bank statements and tax documents you submitted along with the loan application?

Bottom Line

Being denied a small business loan isn’t the end of your business finance journey. Look at the rejection as an opportunity to make your business creditworthy and find the right loan product for your business needs.

Author Bio : Shiv Nanda is a financial analyst who currently lives in Bangalore (refusing to acknowledge the name change) and works with MoneyTap. Shiv is a true finance geek, and his friends love that. They always rely on him for advice on their investment choices, budgeting skills, personal financial matters and when they want to get a loan. He has made it his life’s mission to help and educate people on various financial topics, so email him your questions at [email protected].