Small-business owners who get turned down for a loan often blame the lender. Yet, more often than not, the owner is primarily at fault, because he or she went about borrowing money all wrong.
Loans are a lot like marriage proposals; you ought to be fairly sure of acceptance before you ask. Here’s how to better manage your request for a small-business loan.
1. Don’t rush to apply. Filling out an application seems like the first step in securing a loan, but it’s not. Before you apply, groom your business for acceptance.
Begin by getting a copy of your business’s credit report. You’re entitled to one free copy per year from each of the three major business credit reporting agencies (Dun & Bradstreet Credibility, Experian, and Equifax), and you may buy additional copies as often as you wish. Check for red flags that lenders will notice: late payments, accounts sent to collection agencies, too much borrowing, and so forth. Do the same with your personal credit report, which counts a great deal with many business lenders.
After you turn those red flags green, go through a quick “restart” of your business: Write or update your business plan to include specifics on how you will spend the money you want to borrow. Show how you intend to operate and describe your projected costs and revenues. Try to give the lender as many details — and as much confidence in you — as possible.
2. Don’t apply to the wrong lender. Lenders, like other businesses, vary greatly in terms of their philosophies, strategies, specialties, expertise, interests, standards, and other operating choices. Applying to one that has never lent money to a business like yours is far less likely to produce the results you want than applying to one that’s tightly entwined with other entities in your industry.
Getting turned down is not good for your business, because excessive applications for loans can lower your company’s credit scores.
To find the best lender for your loan, talk with your business advisers, visit various financial institutions, and attend any informational seminars they may hold. Read trade journals for names of lenders currently working in your industry. Search the web for information about specific lenders’ unique criteria.
3. Don’t be naive in filling out the application. Understand that the application form is asking you to tell the lender your story. Each of your answers should complement and augment the others to offer a compelling “business case” about your company and your planned use of the loan.
If you have important information — new product or market opportunities, potential savings from equipment purchases, or whatnot — that isn’t requested on the application, submit supplemental pages, so that the lender sees the full picture. (Having that updated business plan will be a big help.)
4. Don’t take rejection personally. A rejection of your loan application is not an indictment of your business plan or your entrepreneurial acumen. It could be the result of a change in the lender’s priorities or a temporary cash shortage.
The best response is simply to 1) ask why you were turned down, and address any weaknesses the answer reveals in your application, and then 2) turn your attention to the next most likely lender. If you’ve chosen the lenders to which you apply carefully, you’ll almost certainly get your loan before you apply so often that you risk damaging your credit rating.