Home > Credit 101 > Denied Business Credit? Work on These 5 Things

Comments 0 Comments

Small Business LoanMost people know they can hurt their chances of receiving a line of personal credit by making certain mistakes, such as paying bills late. But businesses, too, can blunder when it comes to applying for credit.

If your company recently applied for business credit and was rejected, it’s not alone. A recent survey of banks and asset-based lenders found they rejected more than a third of all businesses’ applications for loans, according to Pepperdine University’s 2013 Capital Markets Report. If your business credit application is denied, what should you do?

The first step is no different than when a personal loan is denied. Before exploring other loan options, you should try to find out why the application was denied. According to the Federal Trade Commission, you should submit a written request for the reasons within 60 days of the denial, and the creditor must give you the specifics in writing within 30 days of the request. Consider discussing any concerns you have with your lender, and you may be able to resolve the problems. The Equal Credit Opportunity Act prohibits creditors from denying a loan based on reasons that have nothing to do with your creditworthiness, per FTC regulations.

In the Pepperdine study, a company’s size or economic concerns were rarely cited as the reasons for declined loans. The top reasons instead were linked to the quality of the business’s earnings or cash flow, or to the fact that a company lacked sufficient collateral.

After being denied business credit, it may be tempting to apply for a personal line of credit for your business. However, experts warn against mingling personal credit with the financial assets of a business because it increases the liability of shareholders or partners of a corporate entity.

Free Tool: Credit Report CardSo instead of turning to personal credit, the next thing you can do if your business credit was denied is take a good look at your own business. Examine how it rates on the financial metrics that can best predict default — the exact scenario lenders want to avoid. Similar to a pre-approval process for a personal loan, a business credit report is one way to see how your firm stacks up against its peers.

Below are five financial metrics that Sageworks Inc., a financial information company, has identified as the best predictors of default, so if you’ve been denied credit, consider working to improve your company’s measurements in these areas.

[Free Resource: Check your credit score and report card for free before applying for a credit card]

Cash to assets. This is a key measure of liquidity that indicates how much flexibility a firm has to deploy cash or access liquid accounts in order to make good investments, says Lawrence Litowitz, a partner at strategic advisory firm The SCA Group LLC. Managing your accounts receivable to ensure you’re getting paid as quickly as possible and managing inventory to avoid tying up cash are two ways to improve this metric.

EBITDA to assets. Comparing EBITDA (earnings before interest, taxes, depreciation and amortization) to a company’s assets helps show how efficient the business is. Improving this metric often involves either raising revenues (without a similar increase in expenses) or cutting costs. Not easy tasks, but using customer suggestions or improving planning are a few ways to boost revenues. Review overhead expenses, such as telephone and equipment, or revisit vendor contracts to seek expense savings.

Debt service coverage ratio. This is measured by comparing EBITDA to a firm’s current portion of long-term debt and interest expense, so boosting EBITDA with some of the suggestions above could yield improvement in the ratio. One effective way to tackle the debt and interest side of this ratio is to cut expenses and apply the savings toward paying principal on the debt.

[Credit Cards: Research and compare business credit cards at Credit.com]

Liabilities to assets. This ratio indicates how much of your assets are financed through debt, as opposed to through profits from the business, so improving this metric is all about reducing your debt. The Better Business Bureau recommends making the biggest debt payment possible each month, especially for credit cards, which typically carry high interest rates that otherwise accrue interest payable, another liability account.

Net income to sales. This is a fundamental measure of how profitable your business is. Cutting operating expenses can be a short-term way to boost this ratio, but it can also backfire, so tread carefully. For example, skimping on equipment maintenance could lead to more expensive repairs or replacements. Longer-term goals required to improve profitability involve lowering production costs and increasing higher-profit sales.

Running a successful business isn’t a sprint; it’s a marathon. In the same way, addressing issues that contributed to a credit denial may take months, or even years. But in the long run, the efforts should help you win not only a loan but also a better, more lucrative business.

Image: Siri Stafford

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team