As most seasoned small business owners know, getting financing can be difficult.
This is mainly because banks view small businesses as risky to lend to because of their high failure rates. But while banks may be selective in who they lend to, many small business owners get rejected for reasons that are either completely fixable or avoidable.
This includes issues like having a poor credit score, low profitability, cash flow or revenue, limited business credit history, a weak business plan or not having enough assets to put up for collateral.
If you've been rejected for a business loan, chances are that it is due to one of those issues or something similar. And that's ok -- because it's likely fixable.
When you're ready to try again, here's what you should do to increase your chances of getting approved:
1. Find out why you were rejected
Meredith Wood, vice president at online credit marketplace Fundera, advises business owners to follow up with their lender and find out why they were rejected. Her advice: "Get as many specifics as possible." That way, you can identify what problem areas you need to work on and make a game plan to tackle them.
Getting specifics can also help you determine if the lender was even the right one to work with. Maybe you own a newer business and this lender prefers to work with established companies. Sometimes it may be a matter of finding a lender that's a good fit for your business.
2. Hire a professional bookkeeper
If you have been doing your own accounting, it may be time to hire a bookkeeper or accountant to get your books in order.
"The analogy I use here is like a hair stylist -- everyone can tell when you've cut your own hair unless you're actually a highly skilled beautician," says Rob Satrom, co-owner of tax and accounting firm Nuance Financial. "Having a professional accountant get your bookkeeping up to date and then perform your bookkeeping for you, means a great deal to a bank."
3. Improve revenue and profitability
Poor cash flow, revenue or profitability are among some of the main reasons small business borrowers get rejected. If you can't demonstrate that your business is financially sound, a bank is going to think -- probably correctly -- that you won't be able to pay back a loan.
A simple way to immediately improve cash flow and revenue is to get paid from your customers sooner. To do this, you can offer discounts for invoices that are paid upfront or quickly or, if applicable, offer ways for customers to easily automate their payments to you.
You should also evaluate your current operating budget and see how you can reduce or get rid of unnecessary expenses (hiring a professional bookkeeper can help you with this).
4. Build your personal and business credit
If your credit score is an issue, you should be acting now to improve it. For a poor personal orbusiness credit score, focus on paying bills on time and in full, paying off existing debt and renegotiating payment plans with your creditors.
If you can show lenders you're being proactive about repairing a poor credit score, you will increase your chances of getting approved for a loan.
If you have a limited personal credit history, get a personal or business credit card. For your business, see if you can get a line of credit from one of your existing vendors to build your business credit history.
Make sure to pay on time and in full -- this is the easiest way to improve your personal and business credit score.
5. Consider other options
It can be smart to do your banking in one place, but when it comes to getting a loan, you should be shopping around.
Talk to small banks, large banks, credit unions, alternative lenders and even different branches of the same bank. You may find that while one bank rejected you, another is happy to approve your loan application.
You may even want to look outside traditional lending to crowdfunding or equity financing. Both are great debt-free ways to raise capital (though they are not ideal for all types of businesses).
Although getting rejected for a loan feels like a major setback, you can increase your chances of getting approved the second time around by following the steps outlined above.
"Don't get discouraged," Wood says. "Once you find out why you were rejected, you know exactly where your business needs to focus in order to become eligible for credit down the road."