What to do when your business loan application is declined

It is disheartening to be rejected and nobody can imagine the feeling like the one who has experienced it. It is so painful to have all the plans laid out for growing a business only to be frustrated by a lender who turns down the application for a loan, sometimes for reasons that are considered trivial. More often, when a business loan is declined, it does not necessarily mean that the business idea isn’t bankable or the business is not going to do well, it is just that your application does not meet the lender’s requirement and as such your business does not merit that lender’s loan. For whatever reason it was that your loan request was declined, it’s not a problem yet, but it may become a major problem when you don’t follow up with the right actions.

The first step to take is to understand why your loan application was declined. Some lenders would not say why, and some would just give sketchy reasons. So, get across to the relationship manager to get details of why your business loan was rejected and their expectations. You may also seek the advice of a more experienced entrepreneur, especially when you cannot access a relationship manager of the lender, such as in the case of some unconventional fintech lenders that use automated algorithms to pre-qualify borrowers.

Second, review the lender to be sure you applied to the right lender in the first place. For instance, some lenders only provide working capital to small businesses, so when you are applying for a term loan to finance the acquisition of equipment from such a lender, the application has been denied before you submitted it. Another example is lenders with tenor or sector preferences. If you are applying for a loan to finance the completion of a real estate project from a lender that is averse to the real estate and construction sector, you are obviously dissipating your energy and resources in the wrong direction. Some lenders have a maximum tenor of 12 months for whatever loan they grant, so if your application is for a loan of more than 12 months, it would be rejected no matter how good the business seems.

Avoiding these pitfalls in the future is one of many things nairaCompare can help with, as you get the benefit of knowing the focus and preference of each lender you review free of charge on nairaCompare, to be sure you are applying to the right lender. So, you may want to consider putting your application to the right or alternative lenders by reviewing different options that match your financial need.

Though the lender may not have cited a poor credit score as a reason for rejecting your business application, you need to seek ways to improve on it. Incidentally, if your business has never taken a loan, you would not have a credit history and as such would not have a good credit score. One way to improve your credit score and chances of your business loan being approved in the future is to get one of your vendors, suppliers, or landlords to file records of your prompt payment or settlement of invoices with the credit bureaus. Such unsolicited filing can help to improve your credit score.

Amongst several factors that lenders may consider in assessing your loan application, the classical factors remain generic, and all lenders test every loan application for the classical factors: Character, cash flow and collateral. Whilst credit score is a codified scientific way of assessing your character and willingness to settle your obligations as and when due, every lender wants to be sure you would have the adequate cash flow to meet your obligations under the loan agreement if you were granted the loan.

One thing is for you to have the right character and willingness to pay but another thing is for your business to have the ability to pay back the loan and meet interest payments at the right time. Collateral can be taken for granted because some lenders grant loans without collateral, but no lender grants a loan without some test of the borrower’s ability to pay back. Therefore, you need to review your application to be sure you have demonstrated that the business can pay back the loan.

For instance, you are applying for a loan of 12 months to acquire equipment that would only be installed and become operational eight months after you get the loan. The lender knows that the business cannot generate cash flow to pay the loan and interest within barely four months of operation and you have not demonstrated other means of repaying the loan outside of the expected revenue to be generated from the operation of the equipment.

In some cases, entrepreneurs apply for a loan to buy a machine and indeed appropriately matched the cash flow of the production with the loan repayment but failed to demonstrate that they have the working capital to undertake the required level of production that would ensure repayment of the loan. In such an instance, the lender knows that after acquiring the equipment, the business would be stranded and unproductive because it would then dawn on the owner that there is a need for working capital to run operations. For this, it is important that all relevant issues are appropriately considered in demonstrating the ability of the business to generate adequate cash flow to meet the loan obligations.

If you have existing loans, there is a tendency that lenders would be wary of granting you a new loan. The finance experts would say that your business is over-leveraged. As good as a loan is, its overdose is not good. This may be the reason lenders reject your new loan application when they think you have too many loans already. In such an instance, you may consider raising more equity. If your business is at an early stage and may not generate cash flow or profit in the near term, lenders and traditional investors may not be excited about the opportunity. You may consider crowdfunding options or seek venture capitalists who may be able to take the journey with you.

In conclusion, when your loan application is denied, it is not the end of your entrepreneurship journey. You only need to take the right steps. More importantly, nairaCompare would give you the opportunity to explore alternatives, so you can always meet your objectives. The rejection of your loan application may be a blessing in disguise if you take the right steps afterwards.

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