Having a bank turn you down for a loan really sucks, I can tell you from experience. It's humiliating, causing you to doubt your own worth and want to huddle in your bedroom, with the shades down.
Don't give in to that temptation. A rejected loan application is not necessarily a judgment against your earning power, the prospects for your business, or even the value of your assets. So take a brief break to do whatever bucks up your spirits and then follow these tips from Roberto Barragan, CEO of alternative lender Aquaria Funds:
1. Don't take it personally.
Never were the words "It's the economy, stupid!" more apt. "It continues to be a very difficult small business loan environment," Barragan says. Bank regulators look closely at small business loans, he explains. Even if a business has never missed a payment, broke even in its second year, and turned a small profit in its third, they may require the bank to keep more money in reserve to cover what they perceive as a risky loan. That means many banks will be reluctant to write small business loans, even to solid, money-making businesses.
2. Ask why.
The bank will send a letter to notify you of its decision, but that letter will likely contain little actual info. But a loan turn-down is a chance to learn how to improve your chances next time, so don't miss that opportunity: Grit your teeth, get on the phone, and ask the loan officer you worked with to explain exactly why you were rejected.
"There's nothing to be shy about," Barragan says. "Say, 'Explain to me what I missed. What can I do to get a loan in the future?'"
3. Check your credit score.
According to Barragan, this is a big tripping point for small business borrowers--their personal credit history gets in the way. If you have a foreclosure or short sale in your past, or even excessive credit card debt, it can hurt your credit score and thus your chances for a business loan.
"Nowadays, banks are looking for a credit score of 720 or better," he says. And, he adds, a credit score below 680 will be a real impediment to all facets of starting a business, since not only will it be hard to get a loan, but a commercial landlord may ask for a higher deposit, for example.
Your first step is to get a copy of your credit report and see if there are any errors on it--if there are, you can write to the credit bureaus and ask for a correction. Pay down outstanding credit card bills and other (non-mortgage) debt, and make sure to make payments on time.
4. Reconsider your tax strategy.
Many small business owners take every deduction they can when filing their taxes, to lower their net income as much as possible. While this is a good strategy for decreasing your tax bill, it can backfire when it comes to getting a loan, Barragan warns, because it will make your small business appear unprofitable. (And if you're tempted to submit a different tax return to the bank from the one you send to Uncle Sam--don't. They can check.)
If you're going to apply for another loan soon and your 2012 tax return shows little income, consider filing your 2013 return as soon as you can after January 1--after all, there's no rule that says you have to wait till April 15. It's also always an option to file an amended tax return showing higher profits for this year, though you will likely have to pay additional taxes and possibly penalties.
5. Put your own assets on the line.
Barragan recalls one client who wanted a $400,000 loan to open a beauty salon but was unwilling to put up her house equity as collateral. "You can't put all the risk on the bank," he says. "You have to have some skin in the game."
6. Look beyond banks.
There are many ways to get business loans outside the banking industry, Barragan says, so if you've been turned down and don't have good prospects for a bank loan, look for alternatives. To find them, start with the local SBA office or small business development center. "Almost every city and state has state-sponsored small business loan programs," he says.
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