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Was Your Commercial Loan Application Denied?

David A. Krebs can help your business get approved by an alternative lender regardless of your situation.

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Denial Rate for Companies (1-499 employees)

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Denial Rate for Companies (0 employees on payroll)

You are disappointed, naturally, but do not fret, as this is a common experience for many businesses.

You had grand plans to obtain a business loan, whether you were looking to expand your company, refinance your existing loan, meet operating expenses, make renovations, or undergo a management buyout. However, that all came to a crashing halt when your bank said, “No” to your loan application.

This may be more common than you think.

According to a recent study, out of 3,628 companies (with 1 to 499 employees) that applied for mortgage loans, lines of credit, or other financing products in 2017, 23% were declined. The decline rate for companies with no employees on their payroll was even starker – out of 1,340 such companies that applied for financing in 2017, 36% were declined.  (SOURCE: U.S. Federal Reserve System’s 2018 Small Business Credit Survey)

In other words, you are definitely not alone.

Even more reassuring, many turned-down companies – even those that have been declined by banks, not once, but even two or more times – can quickly rebound and successfully obtain a loan from an alternative lender that has different or less stringent requirements than banks.

Being declined by your bank is not a dead end.

The first step is to figure out why your bank turned you down.  We list the most common denial reasons below, including insufficient credit history or high debt levels.

Armed with this knowledge, the second step is to find an alternative lender who is more lenient toward your company’s particular situation.

Step #1:  Determine why you were denied.

Knowing the specific reasons your bank denied your business loan application can help you pinpoint whether you can improve your chances of success with the next potential lender. By law, you have the right to know the reasons for your denial.

Here are some of the most common denial reasons, according to the U.S. Federal Reserve System’s 2018 Small Business Credit Survey, and the Pepperdine University Graziadio School of Business and Management’s 2018 Private Capital Markets Report:

  1. Too new or insufficient credit history
  2. Poor quality of earnings and/or cash flow
  3. Insufficient collateral
  4. Too much debt already
  5. Low credit score
  6. Weak business performance
  7. Other (size of company, customer concentrations, size or availability of personal guaranties, insufficient management team, weakening industry)

Chances are you may fit into at least two or three of the denial categories, and you may think they are insurmountable hurdles to getting a loan, but read on.

HELPFUL TIP

You have the right to know.

Under federal law, you have the right to know the specific reasons why your business loan application was rejected.

If your business had gross revenues of $1 million or less in the preceding fiscal year, the law requires the bank to either (1) provide you an oral or written “statement of specific reasons” for the denial; or (2) simply notify you that you are entitled to the statement if you ask for it within 60 days of such notification. 

If your business had gross revenues in excess of $1 million in the preceding fiscal year, the law requires the bank to provide you a written “statement of specific reasons” for the denial if you make a written request for the reasons within 60 days of the bank notifying you of the denial. 

Therefore, if your bank has yet to give you the required “statement of specific reasons,” you should ask the bank for it. The bank’s statement must be “specific and indicate the principal reason(s)” and cannot simply state, for example, “You did not meet our internal standards.” 

SOURCE: Equal Credit Opportunity Act (implemented by “Regulation B” or “Reg B”), 12 C.F.R. § 1002.9(a)(3)(i), (a)(3)(ii), (b)(2).

Step #2: Find an alternative lender with the right loan program for you.

Many business owners believe that once their bank rejects them, they have nowhere else to turn. They would be pleasantly surprised to learn, however, that there are many alternative lenders who, as compared to big banks, have more relaxed requirements and are willing to take on more risk.  Alternative lenders have a wide variety of special loan programs that are specifically geared to businesses who were turned down by their banks, even applicants with insufficient credit history, poor cash flow, insufficient collateral and/or too much debt already.

It is highly likely that your bank denied you because you did not satisfy their strict guidelines, which are known as “lender overlays” or “bank overlays”. The federal government sets official minimum standards, but most banks are more conservative and therefore apply additional guidelines on top of the official standards, hence the term “overlays.”

The key, therefore, is finding a lender who imposes fewer restrictions or overlays than your bank, which will boost your chances of getting approved. No matter what the reason was for your loan being denied, there is a loan program out there for you.

HELPFUL TIP

Businesses, like people, have credit scores.

Like consumer credit scores, business credit scores fall within a certain range, and the higher the score, the lower the perceived risk. While consumer credit scores generally range from 300 to 850, a business credit score might range from 0 to the 1000s, depending on the company providing the business credit score. The four major business credit bureaus are (1) Dun & Bradstreet; (2) Equifax; (3) Experian; and (4) FICO.

If your company is just starting, some of the credit bureaus (like Equifax and Experian) will not generate a business credit score for you until they are able to gather sufficient information about your company’s different milestones, including payment history to creditors, opening of business bank accounts in your company’s name, obtaining a federal Employer Identification Number (FEIN), and obtaining a listed telephone number in your company’s name. You can request Dun & Bradstreet to start compiling your company’s credit score by applying for a free identification number known as a “D-U-N-S Number.”

Unlike with consumer credit reports, you are not entitled by law to free access to your business credit reports. However, companies such as Nav offer free trials to let you access your business credit report, or you can contact the business credit bureaus directly to pay to see your credit status.

 

SPOTLIGHT – LOAN PROGRAMS

We highlight some notable, creative programs offered by alternative lenders addressing a variety of situations:

Low credit score?

Some lenders have less stringent credit requirements and are willing to accept low scores that a more conservative bank would not otherwise entertain.

Too much debt?

Was your company’s level of debt considered too high? Other lenders do not even require a certain debt-service coverage ratio (DSCR or the measure of your company’s cash flow available to pay current debt obligations) and instead are willing to only consider the value of the property and extend your company an asset-based loan.

Line of business considered too risky?

Was your loan application denied based on the particular industry your business is in? Other lenders are willing to provide loans for a wider variety of commercial property types, including bars, taverns, automotive repair, daycare centers, restaurants, mobile home parks, golf courses, hotels, industrial, medical, self-storage, marinas, and senior care facilities.

Need a higher loan amount?

Was your loan-to-value ratio considered too high? Some lenders are willing to accept loan-to-value ratios as high as 80% to offer you the higher loan amount you are seeking.

No tax returns?

Did your bank require extensive paperwork? Other lenders with less stringent guidelines are willing to accept less documentation or alternative forms of documentation (e.g., business bank statements, instead of tax returns).

A mortgage broker can help you find the needle in the haystack.

Wading through the guidelines and overlays of multiple lenders and contacting them directly is difficult, if not impossible.

As a practical matter, lenders typically do not publish their overlays, but instead distribute them exclusively to banking officials such as licensed mortgage brokers.

Also, it is simply not feasible to even find the lenders – many alternative lenders do not advertise widely, but instead rely on mortgage brokers to refer them potential borrowers.

A good mortgage broker with strong connections can quickly and simultaneously shop your loan at several different lenders for the best possible interest rate and terms.

Additionally, mortgage brokers are accustomed to helping businesses that were previously declined for a loan by their banks.

In short, working with a mortgage broker gives you access to a variety of lenders and more options.

Conclusion

You are now armed with the knowledge that (1) being denied for a commercial loan is very common; (2) you have the right to know the specific reasons for the denial; and (3) there are plenty of alternative lenders who would be willing to embrace your particular situation and lend money to your company.

See below for some sample success stories of how we helped businesses, who were previously turned down by their banks, obtain commercial loans.  We would be glad to help your business as well.