Let us say a person puts together a business plan. They did the math to find out exactly what they needed. The borrower did some research about their small business debenture options, diligently completed the necessary paperwork, and did their good luck dance as they submitted the documentation on their application. But then, their worst fears came true: they were denied that debenture.
Let us face it: there is almost nothing quite as discouraging for entrepreneurs as seeing their company dream halted by the decision of one lending firm. Borrowers might feel rejected and dejected, have no clue what to do next, as well as start questioning whether their business plans were meant to come true in the first place. But here is the good news. Of the many business owners who are denied small loans after their first debenture application, a lot of them go on successfully getting financing with later applications.
The key is to find out why their application was denied in the first place, take some steps to improve their financial and credit standing, and choose the right debenture product for their company – before trying again. Do not let one denial hold you back from going after your goals. Listed below are some steps people can take not to make sure that their next debenture application will result in a huge yes.
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Request explanations from lending firms
Once loan officers have given the application that stamp of denial, borrowers are not likely to change their minds. But a lot of financial institutions will be more than willing to provide letters of explanation detailing why the business debenture application didn’t meet their requirements.
Understanding why people have been denied a debenture will be very important as they try to re-apply for credit in the near future – and the answer might not be as crystal clear as they may think. Letters of explanation from lending firms will allow borrowers to address these certain concerns before looking for funding again in the near future.
Check personal and business credit reports
Suppose a person has ever bought a car or a house or even applied for a condominium or apartment lease. In that case, there is a good chance that they are familiar with their personal scores, as well as the impact it can have on their access to different financing options.
But did people know that these scores also weigh heavily on their access to small business debentures as small or startup enterprise owners? That is why, upon getting denied a debenture, the first thing people need to do is to check their personal credit history, score, or report for forgotten financial issues or any discrepancies that may have contributed to the rejection.
People need to ensure that they check their credit reports with major reporting organizations since different agencies may report and receive different info about their credit history. In case people find errors on their credit report, they can reach out to agencies in writing to have the info corrected immediately. They do not want errors to impact their ability to get loans.
Along with people’s personal credits, their companies also have their own credit score and report, which factors into financial institutions’ criteria. But for most small or startup companies, the challenge of business-credit reports usually stems from the lack of credit – particularly if the company is relatively new or has never sought loans before. Borrowers need to work to build up their company’s credit by asking creditors, vendors, or landlords of their office or retail property to report their payment history to reporting organizations like Equifax, Dun & Bradstreet, or Experian.
Take some steps to help improve the business’s financial standing
While the personal and enterprise scores will usually be the most important and influential factors in a financial institution’s decision process, the internal financials of the business – especially the strength of its annual revenue, business savings, and cash flows – will also be thoroughly considered.
Taking an honest look at various factors from the lending firm’s point of view can help individuals to find out what steps they need to take to improve their financial standing or choose a debenture product that will be a good fit for their company.
The best way to do this is to take a closer look at what is called DSCR or Debt Service Coverage Ratio. This formula is a tool that financial institutions use to determine whether the enterprise has the needed cash flow to make loan payments regularly and on the dot. If you do not know what a Debt Service Coverage Ratio is, here is the basic formula you will need to calculate your DSCR, including your anticipated debenture as part of these calculations:
Yearly net operating income plus depreciation and other non-cash fees divided by interest plus current maturities of long-term debentures.
Debt services of less than one indicate that the company’s debt will exceed its available cash flow. It means financial institutions will surely deny the debenture. Most lending firms look for higher DSCRs (1.25 or more), with a reaction of at least 1.5 being ideal.
Even if the borrower has been denied a small enterprise loan because they had low DSCRs, they may not be able to increase their revenue or reduce expenses to re-apply immediately. If this is the situation, companies can consider looking for lower amounts of funding to increase their chance of getting approved until they can build up their organization’s financial standing.
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Consider other loan products
Experts cannot say this enough: Denials from lending firms on loan applications are not denials all the time. Differences between lending firms’ standards, requirements various loan products have, as well as amounts and terms of the financing can usually mean that even without making huge changes to the credit or enterprise finances, businesses may still be able to get a small enterprise loan pretty quickly if they explore their options and other alternatives.
Carefully apply for a loan next time
Beyond the challenges of poor credits or the company’s choice of the wrong loan product, there are oversights or mistakes on enterprise loan applications that could be why they were denied. Did the organization have all the necessary documents? Did they double- and triple-check their identifying info and other aspects of the application form to get it as accurate as possible?
Did their balance sheet and loss and profit statement match the company’s bank statement, as well as the tax documents that they provided? It is time people get a second pair of eyes on things they submit so that they do not risk a double disappointment.