Whether the bank rejects your business loan based on a bad credit rating or insufficient earnings, we’ve concocted the 5 best options for turning this setback into a comeback.
Stop applying to the bank
One common course of action businesses take that harms more than helps is applying for more loans when they already have a loan refusal history. This is because for each credit application you make, the incident is added to your credit file regardless of whether it’s accepted or rejected. Multiple applications, especially in close timing to each other, may give the impression that you’re in a desperate situation. Not only does this affect your value proposition, but it can damage your credit rating. Why? Because banks run hard credit checks every time you apply, and incurring these hard checks frequently impacts your credit score negatively. Your credit rating is critical to everything- from your likelihood of loan approvals, to the amount you’re allowed to borrow, to the interest rate you’re charged. If the bank rejects your loan application, make sure to explore all your options before you re-apply, or think about applying to another bank.
Get a co-signer
But what if the only barrier to your business loan approval is your insufficient income? You can overstep this hiccup by having a co-signer who does have the assets, and is willing to pledge on your behalf.
What is a co-signer? Someone who can stand as an assurance for your liability – who has the assets to guarantee the loan will get paid off in the event you default. This should be someone you trust, has enough assets to pledge, as well as a great to excellent credit rating.
Why co-sign? To increase your chances of getting a business loan, the bank needs a guarantee on their loan repayment. So, if you provide a co-signer (or guarantor) who can fulfil this criterion, you’re automatically in a preferable position.
Whether you choose a family member, friend, or someone else, there are a few risks you should acquaint yourself with before committing to co-signage. Most importantly, ensure you have a clear understanding between yourself and the co-signer about the different eventualities that may happen and how you would handle those- should anything go wrong. This can go a long way in maintaining stability during times when you could do without the additional stress.
The large liability your co-signer takes on: if you miss a payment, your co-signer is rendered accountable and responsible for making it up. In the worst case scenario of death, the co-signer would then have to take on the debt of the diseased.
The limitations your co-signer creates: if your co-signer has co-signed for (too many) other people; for example a mother who becomes a co-signer for her 4 children, it may appear to the bank as if she has debt, even if she doesn’t. This would then result in restrictions in your spending capacity, as the bank would prohibit your business from making big purchases.
The resistance from re-applying: it may be the case that you now have to re-apply for the business loan with your co-signer. But, as previously mentioned, re-applications come with hard credit checks for both the applicant and co-signer, which is a hit to both your credit ratings that may not be worth taking. This is because lower credit ratings leads to more resistance from banks to give your loan a go. A cost-benefit analysis with your company’s priorities in the equation is warranted in this circumstance.
Borrow from a private lender
So what happens when you don’t want to take on, or can’t get a co-signer, and there’s no other way to get around your problematic credit score? No need to panic – you still have options, and borrowing from a private lender is most likely your best bet.
What is a private lender? A non-bank individual or organization that provides loans to ventures that don’t necessarily fulfill all the traditional parameters for approval of a bank business loan.
Private lenders typically have lower application and eligibility requirements, increasing the window of opportunity for you. Their focus is on your loan-to-value ratio, so if you prove your worth regardless of your credit rating, they could have your back. They are more interested inthe overall health of your business, not just your credit score and collateral.
So, you don’t have to let the stringent framework of banks limit you. Find a private lender who sees the value of your company and your potential moving forward, instead of giving over-significance to your past credit history. Don’t know where to start in terms of finding a private lender? We understand the search can seem overwhelming or daunting.
Lendified and Liquid Capitalare some of the private business loan options worth considering. Lendified is Canada’s premier lender for small businesses who can’t get enough capital from their bank. The company was founded by former bank executives dedicated to providing businesses with fast and affordable capital. Through Lendified’s simple online process, business owners can get a free quote for up to $150,000 in minutes and funding in as fast as 48hrs. Some businesses also use Lendified to replace existing financing from other private lenders and report savings upwards of 40%.
Get a mortgage broker
How do you decide which lender or loan is best suited for your business needs and goals though? Consider getting a mortgage broker or loan specialist to help with that. They will analyze your situation, based on their experience and expertise, to help you determine which financing option is the right fit for you. Further, their access to promotional offers banks and lenders don’t want you to know about also gives you an advantage in finding your most suitable funding solution.
What is a mortgage broker? Independent from banks, someone who is a licensed mortgage broker and has informed access to multiple lenders. They act as an intermediary between borrowers and lenders, whose commission is paid by the lender or borrower depending on the nature of the service they’re hired for.
In your case as the borrower, you’d have to pay for a mortgage broker. They take a small percentage of your loan (usually 1% or 2%), but the benefits, especially long-term-wise, outweigh the seeming burden of paying them. They synthesize everything you’re looking for, so you don’t have to get perplexed by all the scattered options out there, or worry about whether you’re even in-the-know about what all is out there, what options are legitimate and scam-free, and if you’re getting the best deal for your purposes.
Partner with friends and family
If all else fails, or if this may be your most favourable alternative to bank loans – you can partner with your friends or family members. In return for their funding, you can offer them a stake in your company. You can work out the percentage of ownership with them, and coordinate how much control, influence, or participation they will have as a stakeholder or a shareholder, depending on the type of partnership agreed upon.
Make sure to have an honest talk with your loved ones when it comes to this option, however. A written agreement on the terms and conditions all parties are set on is also a must, as it is important the lines between personal and professional are not blurred to prevent heart-wrenching consequences. The last thing you want is to severely dent your personal relationships for your professional one. There are many perks to this type of funding though, as trust and collaboration can be capitalized upon in the best ways since you’ll be working with someone whose personality, perspective, and worth ethic you’ll know inside-out.
Where to go from here?
Whatever you decide, rest assured you have these tried and true solutions to bank loan alternatives. And more often than not, it works out for the better. So don’t get discouraged! You can also talk to founders of other businesses who’ve taken the less traditional path to get insight, inspiration, and ideas that can inspire you to flourish your own. Just make sure to prioritize your unique set of business values, and pick the option that caters to your own mission and vision, rather than follow what other companies did just because it worked for them. It’s all about finding your best fit so you can disrupt traditional ways of thinking and financing in order to build the business you believe in, and turn it into a skyrocketing success!