It may seem odd that a bank would reject a small business for a loan, especially if that business has been successful and is looking to grow. Companies new and old often face this rejection, and it may feel like a death toll. But understanding why an application was rejected may help prepare to fix the problems and allow the business to obtain financing in the near future.
Rejection Stings. What Happened?
There is a myriad of reasons why a bank may have chosen to reject a loan request. While pinning the cause down to a single issue is unlikely, a bank’s rejection generally comes down to a handful of things. The banks may be unhappy with credit scores, cash flow, CRA payments not being up to date, collateral, the amount of pre-existing debt, or other external conditions. They may also avoid lending to some industries, early-stage startups, companies with poor business plans, or requests which don’t make sense. Some of these are problems that can’t be fixed. As much as we’d like to do so, no one can control the world, and the age and status of a company can be improved with time. But there are items that can be fixed and may help improve the chances of loan approval.
Fixing a Problem by Planning Ahead
Going into any business transaction requires research and planning. The same rules apply when applying for a loan. Before a business owner even walks into a lender’s office, they should have all the important information ready. This means knowing their personal and business credit score, having a proper business plan in place, and a proper explanation of collateral and cash flow. Preparing these is not always going to be an easy task. Credit scores can be found through companies like www.equifax.ca or www.transunion.ca, each of which can provide a comprehensive report.
There are several ways to improve credit scores for business owners who were initially rejected by a bank due to bad credit. Planning a proper payment schedule on any loans or credit cards and using an appropriate number of credit cards can help change a low score into a high one. Ensuring that your name and address are exactly the same with all your credit cards can also improve your score.
With proper planning, a credit score can improve in six months to a year. A business plan and cash flow solution can be prepped with the help of financial advisors, legal assistance, and professional guides. Cash flow problems are often solved by cutting expenses, even temporarily. It may not be what businesses want to hear, but sometimes removing a defunct machine or lowering staff size can help a business push their spending into the black. Finally, using collateral can help a bank feel safer in approving a loan. It may not be ideal to put personal property (collateral mortgage only) up against a business, but it can help banks feel better in what they view as a possibly risky investment. With proper planning in repayments and expenditures, the risk to the collateral is minimized.
Planning for a loan application ensures that each possible problem is prepared for. It also helps make the actual application process, which can be its own unique nightmare, easier and less stressful. With a proper plan and a prepared mindset, these problems can be worked through.
You Can’t Always Get What You Want
You can, of course, prepare completely for a loan request and still be denied. Traditional banks may be more risk-averse than in the past, or they may no longer be working in that industry, or they may see no path forward for the applicant. In those scenarios, a business loan broker can help. Alternative funding is now a 40 billion dollar industry in Canada. We can work with small business owners to find unique solutions to their financial needs. Alternative lenders like Alternative Funding Partners Canada can connect you to funders for short term unsecured loans, equipment leasing, sale-leasebacks, purchase order financing, inventory financing, asset-based lending, and accounts receivable financing. We can reduce merchant advance loans by 25%-40%. If you are looking for alternative funding options, give us a call.
Call Roni-lil at 403-807-7651