What to do when the banks say no to your business loan request?
Well first let’s discuss the reasons a bank could say no to your loan request and what you can do about it:
Wrong Bank: There is a very good chance that you are at the wrong bank. Every bank has a sweet spot for loans and your loan request might not be in it. Some banks are only “dirt banks” i.e. they only lend against real estate. Some banks do not do any SBA backed loans or loan against inventory. All banks have a legal lending limit based on their capital situation. That said, your request might be too big for a community bank.
Time in Business: If you have been in business less than 2 years the history of your business precludes most banks from lending you money. They could make you a personal loan but that is based solely on your assets, credit score and ability to pay back the loan.
Your Personal Credit: Unless your business is large with substantial cash flow, assets, and history; the loan will be based mainly on your personal credit. Now there are alternative funding sources like Invoice Factoring Companies and Merchant Cash Advance Companies who look more at the assets you have, i.e. Invoices to creditworthy clients or a constant stream of credit card receipts.
Client Concentration: If you sell to big companies there is a good chance that one, two or three customers are 40-75% of your sales. Banks hate concentration as they know if you lose your largest clients that your cash flow and subsequent ability to pay back the loan will be put at risk. Again, an Invoice Factoring Company can help as they deal with client concentration issues every day. For example, we have had single client customers from time to time and it worked out great for all parties.
Wrong Assets: Again if you have invoices to creditworthy clients or a constant stream of credit card receipts, many banks can’t help you if your credit, time in business or client concentration issues are a stumbling block. They key is to match up your assets and unique situation to the right lender.
Steps to take when the Banks say No
Take a Hard Look at your Situation: “To thy own self be True” said Shakespeare. Take an honest look at your credit, asset, and cash flow situation. It is probably a good idea to talk to your CPA too. For example, if you have a sub 600 credit score, no bank will lend you money. A restaurant or retailer without immaculate books and records will have little chance at a traditional bank, too.
Understand Your Assets and Who “Likes” Them: I get a little frustrated when I talk to a business owner. Usually, they want x amount of money but only in a certain way. For instance, I talked to an importer who wanted $800,000 in equity when Purchase Order Funding plus Invoice Factoring would probably work for his situation and no ownership would be diluted. Also, they needed less than $1,000,000 which is historically not the size that private equity would look at. I understand that you need to be tenacious and not give up as an Entrepreneur. However, you also need to understand the universe of lenders and funding sources in 2012. Additionally, give yourself a fighting chance of quickly getting the funds you need to grow your business.