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You may have heard stories of business owners applying for small business loans but getting turned down for the full amount. In fact, you may have been that small business owner. Say you needed $100,000 for manufacturing for the year but the lender, perhaps citing lack of collateral or other factors, approved you for only half that amount. It’s a sinking feeling in the pit of your stomach.
But don’t groan yet! As with many things in business, persistence, research and a lot of determination could actually salvage what looks like a hard luck situation.
How? With a loan renewal.
Often the reason that a lender turns a small business owner down is that they’ve found some reason that the business owner isn’t fundable for the full amount applied for. It could be the collateral situation, as listed above, or perhaps a low credit score or even lack of credit. To the lender, the borrower is an unknown entity. Their financial models may go so far as to say that the business owner is a big risk.
But as the lender and the business owner work together, the business owner gradually becomes less of a risk. Now instead of no relationship with the lender, the business owner is a known entity.
At this point, the lender may “renew” the loan and provide the rest of the capital the business owner originally asked for.
Let’s look at an example:
Small business owner Karen applied for a loan of $100,000 to operate her factory for a year. Because she was an unknown entity with limited credit and very little collateral, her lender only approved her for a $50,000 loan for a term of 6 months. But as Karen paid the loan back on time, she built up her credit score and her relationship with her lender. After six months, she had fully paid off the loan. Following, she asked for a loan renewal and was granted the other $50,000 – everything she needed to operate her successful business for a year.
Believe it or not, loan renewals can actually be more favorable for your business than borrowing a large sum all at once.
For one, you’ll pay interest on the entire balance of the loan. When Karen borrowed $50,000 six months later, she avoided paying interest on the entire $100,000 sum for 6 months. Assuming Karen didn’t need the entire $100k up front, she actually saved interest payments in the loan renewal scenario.
Also, a loan renewal may yield more favorable terms. For example, if your credit score or collateral situation has improved by the time of the renewal, you may actually find that you can negotiate a lower APR and/or fees. When you applied for the original loan, you were an unknown entity to your lender. By the time you apply for a renewal, you’ll likely be an existing customer in good standing. And that goes a long way with most lenders.
If you’ve ever been turned down for the full amount of a loan, don’t despair. Even in this age of digital work and international commerce, good old fashioned relationship building can be the key to small business borrowing.
One thing to keep in mind, though, is that if your current lender offers you a loan renewal, before signing on the dotted line, don’t be afraid to shop around. The previous loan most likely helped improve your credit score, and if it also helped you, say, grow business revenues, you might be able to get competitive interest rates elsewhere. You should be just as diligent as you were shopping for the first loan as you are preparing for a loan renewal.