Bank money is the easiest, cheapest money to get for most small business owners. How easy or how cheap are relative terms however, and you may not be having such a great time tracking down funding for your small business, especially if it is a start-up. An SBDC consultant or mentor can help you prepare for a business loan and minimize the “gotchas” that stop most applications. These gotchas can also be avoided with just a little preparation before your trip to the bank.
Your preparations should include doing a little research on what you should receive if your loan application is rejected. Since you are applying for a business loan and not a consumer loan, some of the laws and regulations for disclosure of reasons for rejection are not applicable. You may have to work a little harder to pinpoint the real reasons behind your loan request being turned down. To get specific guidelines on disclosures, consult the Equal Credit Opportunity Act (ECOA, Regulation B) or The Fair Credit Reporting Act (FCRA).
First things first…Personal credit reports vs. Business credit reports
Since so much early-stage lending is based on personal credit scores, you want to check your credit before applying for a loan. This will allow you to catch problem areas before they are an issue. In fact, this may be the only way you learn of personal credit issues if you are applying for a business loan.
Consumer lenders are required to provide an explanation if they reject your consumer loan or charge higher than normal for the loan based on credit findings. This is not completely true for business credit reporting and business lending. While, there are reporting requirements for the lender if they substantially change the terms or loan amount regarding a business loan application, the timing and extension of a counter-offer may determine whether or not you will get a report outlining the reasoning.
You can get your free personal credit report online at AnnualCreditReport.com. If you have established business credit, you can get summary credit reports at Nav.com.
We have all seen instances of entities providing the minimum requirements outlined by a rule or regulation. This can happen when a lender provides the reasoning for their adverse action toward your loan application. Regulations may state that the bank only has to provide the contact information of the organization that provided information that triggered the adverse action. The bank does not have to provide the reason or the process used to come to their conclusion. You may have to call the contact and find that out on your own. This is where knowing your regulations comes in handy. Regulation B as mentioned above, outlines what you should get in a report.
So, in the event you get the basic information, simply ask for the details. Many lenders are taking a more transparent approach and may simply outline the process and the problem areas that stopped the application.
Focus on the details…
While most of this post has focused on credit scores and reporting, don’t forget the details. Make sure information requests from the lender are handled in a timely manner. Be courteous and professional when working with the bank. Brush up on the financial aspects of your business. Many entrepreneurs run a great business, but don’t understand the Balance Sheet or don’t track the cash-flow in their business. You will have to discuss (or defend) the financial claims you make about your business.
Sometimes, you just can’t avoid the obvious…
Unfortunately, some business models are more “likeable” than others. Some industries have higher business failure rates so, the type of industry you are in and how long you have been in it can be a big factor in getting financing. How often you are making deposits and the average balance you maintain can also be a factor in getting a loan. If it appears you have been on a long winding road, shopping for financing for an extended period of time, you may find funding more difficult to obtain. While these points may be obvious, they may also be unavoidable since you can’t readily change industries or alter your past banking habits.
All may not be lost…
Once you find out what the “gotcha” was that caused the rejection, consider the solution and the time it might take to correct it. If you can correct the issue in a reasonable period of time, you may be able to re-apply or simply pick up where you left off. Always ask what the process is after a rejection. You might find that a little more time and effort, may be all it takes to go from declined, to accepted.
If you need assistance putting your loan application together or regrouping after a rejection, contact your local Small Business Development Center. A consultant will be happy to assist you. (Columbia, SC SBDC – 803-777-1020.)