Top 4 Reasons the Bank Declined Your Loan and What to do About it!

Most of the potential customers I speak with have become a bit fatigued. Hours of preparing financial statements and projections, writing out a business plan, and filling out applications have them worn out. Especially since they can't find a lender willing to back their venture. They're about to give up, forgoing growth opportunities to spare themselves further frustration and dejection.

I've found one of the primary reasons for this is that most business owners are not aware that there are alternatives to borrowing from a bank that don't involve surrendering a piece of ownership. Or if they are aware, they are reticent to enter the nebulous world of "alternative financing". Following is a basic explanation of how alternative finance programs are designed to work through, or around, borrower deficiencies that prevent banks from approving a loan.

One of the first killers of loan approvals is poor credit. Banks deem borrowers with credit issues too risky. There are a couple possible solutions to this. If a business needs accelerated cash flow to finance expansion or straighten out its balance sheet - factoring could provide the answer. Factoring relies on the credit of the business' customers - rather than the business (or its owner) itself. Some bridge lenders will loan against attractive collateral. If there are assets in the business with good value and a lot of equity a short term bridge loan could help.

The second approval assassin is lack of collateral. Banks mitigate risk by insuring there are more than enough assets to liquidate to repay the loan should there be a default situation. There are revenue based business term loans that assess repayment ability on revenue. If the business has a steady monthly revenue flow and is profitable a lack of collateral is not a deterrent.

Banks are also hesitant with newer or start up companies. The lack of history creates a perception of higher risk, as the business has not proven it serves a sustainable market. If the business has procured purchase orders from credit worthy customers, purchase order financing can fund the early growth of a company.

The final deal killer is a lack of liquidity. If the business and its owner do not have much cash on hand, proving the ability to step in and cover payments should revenue slow, the bank will not take the risk of lending. Several of the previous mentioned programs could potentially step in here. Factoring, P.O. financing, or revenue based term loans are not concerned with current liquidity as much as other factors. These products, in fact, are designed to improve a business' liquidity - allowing it to flourish to the point where a bank judges it credit worthy.

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Comment by Killian Johnson on October 20, 2016 at 9:24am

Well written. Factoring (and especially spot factoring) is a great solution for a business with low liquidity. 

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