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“What if I have been denied before?” How to Increase Your Chances for Loan Approval

Author: Colorado Department of Agriculture

“What if I have been denied before?” How to Increase Your Chances for Loan Approval

If you’re getting ready to apply for a loan, there are some key factors that are important to know that could help you get your loan approved. If you’ve already applied for a loan and you have been denied, do not worry, you can always make adjustments and apply again. It’s not unusual to shop around for the best funding options for you. In fact there are some really great, non-traditional programs out there for agriculture loans, like the CAFL Program. Here are a few common reasons loans are denied.

Not understanding your lender

Every lender is different, and each loan applicant is different. Different banks have different requirements. There are lots of reasons a business loan could get rejected and it doesn’t mean your lender doesn’t understand you, or your idea, or they don’t trust you. As an applicant, you need to be prepared and do your homework on the bank you are working with and know what their requirements are. If you do get rejected, knowing why you were declined is good information to have and can help you make adjustments before you apply again, or look for other options.

Unmet requirements or lack of documentation

Carefully review your financial documents and make sure you have met all the requirements. If you don’t meet some of the requirements of a particular financial institution, you may want to look at other prospective lenders. The CAFL Program, for example, supports agriculture businesses including farmers, ranchers, and other businesses that relate to agriculture like processors, even if you don’t have a strong credit record. If you have the experience, desire, and work ethic, and you can show a thought out business plan,financials, and other required documentation, you could still get approved at a low, fixed 4.17% APR through the CAFL Program.

Poor credit score or lack of history

For better or for worse, a credit score is a widely accepted way to evaluate an applicant. Lenders look at your credit score as well as personal credit, revenue, time in business, or a combination of these and other factors to assess the risk of making a loan. Essentially, a lender needs to be sure you will be able to pay back the loan. The best way to know whether you can pay back a loan, is to look at if you have paid back a loan before, and how much debt you are currently carrying. So if you made some mistakes or had challenges in past years that you are still paying for now, this could affect your ability to get a loan today. It doesn’t seem fair at times, but it is the nature of the industry. If you have a low credit score, or a lack of credit history, try to pay off any debt you have, and establish a good credit history. One way to do this is by using a credit card and paying off the balance every month. Or, you can look at funding options that will work with you to build your credit-worthiness, such as the CAFL Program.

Incomplete business plan

This is a really important part of the process, especially if this is a young or new business, if you do not have a lot of experience in agriculture, or if you do not have a strong credit history or credit score. The business plan is where you can build your case for your agriculture business and prove that you are capable of running and growing your ag business, and you have a solid plan for paying back the funds that are loaned to you. The CAFL Business Plan Builder has prompts and questions that will help you define your plan and think through the details of your financial projections. Lenders need to weigh the risk of lending to you, and a robust business plan can make a big difference. The business plan doesn’t need to be formal and you don’t need a business degree to write one. It’s simply a plan that tells the story of your business. At its best, it demonstrates that you understand your customers, products, means of production, and market trends. It’s your chance to show off your great idea and business smarts!

Deficient application

You have to show that you are willing, able, and eager to do the work. This starts with taking the time to complete the entire application, and give it your complete attention. If your application is sloppy or incomplete, a lender could think this is how you would operate your business as well, and may have second thoughts about approving you for a loan. Your business loan application is only as good as your documentation and eye for detail. A common reason for loan rejection is due to deficient or incomplete applications that fail to provide all of the requested information and documentation. Your documentation is used to determine whether you’ll be able to repay the loan. This is your chance to make a great first-impression.

Risky business

If you’ve never pulled your business credit report before, you may not even be aware your business has an assigned code that tells lender, vendors, and creditors what industry your company falls in. Some lenders consider entire industries too high risk for lending. Your NAICS or SIC code may be the reason your business loan application was rejected. If you’re in the agriculture industry, and you think this could be why your loan application was rejected, then you should definitely look into the CAFL Program. The CAFL program is designed for agriculture businesses and you will not be deemed as “too risky” simply for being in agriculture.

Too many UCC Filings

When you get approved for a secured business loan, the lender will often file a lien with your state’s Secretary of State to protect their investment. This doesn’t mean they are actively coming after the assets to recoup repayment, but it gives them the right to reclaim the assets if you default on the loan. It’s a way of ensuring they are at the “front of the line” if you have other debt collectors coming after your assets as well. Some lenders will not lend to you unless they are the only or “first-in-line” lender with a UCC filing on your business. The problem can pop up from time to time when a lender on a loan that’s paid in full forgets to remove the lien filing. This is surprisingly common, and not-surprisingly very annoying. It can take six weeks or more to have a UCC filing removed, so check your UCC filings now if you don’t already know what they are. 

Using personal bank accounts

A Nav survey found that 70 percent of business owners without a business bank account had been rejected for a loan in the past two years. A business checking account is relatively simple to set up. It keeps your personal and business finances separate which protects you and your business, and helps give a lender a clear view of your operations. It can be hard for a lender to judge monthly and annual revenues, cash flow, and obligations from a  checking account that also shows personal expenses and payments. It’s confusing and creates extra work for the lender to figure out which is which—extra work a lender will not take the time to do. It also helps establish a history for your business so a lender can see how long you have been in business, and “time in business” is a common underwriting factor for business loans. If your business loan is denied for this reason there’s a pretty simple solution — set one up! Having a business account, and diligently using it, also benefits you in the same way it does the lender. Clear records result in good business intelligence and better decisions. There are plenty of low-cost options out there and a business bank account will make your bookkeeping and taxes easier to manage as well.

It’s true, applying for a business loan can be a time-consuming pain in the you know what. We don’t want the process to overwhelm you, and we don’t want you to be denied a loan and be disappointed either! We hope this serves as a guide before, during, and after your loan process, to make it less painful and maybe even save you from unnecessary rejection. If you are rejected, don’t be discouraged! It doesn’t mean the end of your farming or ranching dreams! Just because one lender denies your application does not mean you won’t get approval from another. The CAFL Program was set up specifically to support those in the agriculture business who would not qualify by traditional lending standards. If you think it could be right for you, call us at 303-869-9021.

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