Rejection is a tough pill to swallow, especially if you're an entrepreneur looking to build up a new business. A recent survey by the Federal Reserve found that there is an 80 percent chance that a bank will reject you for a loan if you are a startup or a small business. Yet, traditional banks remain the top destination for small business owners when seeking financing, and while there are alternative options out there should the business get denied, analysts agree that SMEs should get educated on why they were rejected and what to do about it.
Efforts to raise awareness on the reasons behind bank rejections saw an uptick earlier this month when reports surfaced of Wells Fargo actually calling the small business owners who were denied a bank loan.
"Some people are ready, and others have to become credit-ready," said Wells Fargo Head of Small Business Lisa Stevens in an interview with Forbes. “We realized that we wanted to be approving more people, and that part of the relationship with the customer isn’t just approving them for loans but being on the journey with them when they get declined.”
Lending marketplaces are getting in on the educational efforts, too.
New Business Funders, a platform that connects SME borrowers to a network of bank lenders, has just released a guide for entrepreneurs to understand the factors that go into making a loan application decision and may help to explain why some businesses get a stamp of rejection.
"It can seem to be daunting at first when you go to apply for business funding and are unsure of what your options are or where you should even apply, much less the paperwork and credentials you'll need to have in order," the company's spokesperson, Troy Bohlke, said in a statement.
The company's guide offers insight into some of the less-obvious reasons a business owner may have gotten rejected for a loan.
For example, while some entrepreneurs may already be aware that personal credit performance is factored into the decision ("Since your business is new, and is not established, you'll have to rely on your personal credit score to get approved for new business funding," New Business Funders explained), understanding ways to apply and what to apply for can also impact the result of an application.
Co-applying for a loan boosts the chances of approval, the company noted, even if a personal credit score is less than perfect. Co-applying with a business partner or even a member of your family can help to expedite the loan application process and bypass the credit score requirement, the guide states.
It is also key to understand the type of loan an entrepreneur should seek. According to New Business Funders, business lines of credit are now more popular than traditional startup loans, as there are fewer restrictions on this kind of financing and, therefore, offer an easier approval process.
The guide advocates for business lines of credit as they provide working capital as the company needs it, but a business only pays interest for what it borrows.
Finally, New Business Funders notes, what a business does once it has secured financing is just as crucial as the preparation stage. Startups should secure a fund management strategy and have adequate insight into working capital flows and accounts receivables to ensure they can repay loans on time. Doing so, the company said, builds and improves a company's credit rating and enables an easier application process the next time around.