In this series of articles (“Bank Turndowns”), we explore why borrowers are turned down by their bank for a loan, and how they can get approved by another lender. To access all the volumes in this series, go to our “Series” page here.
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.
You are disappointed, naturally, but do not fret, as this is a common experience. According to the U.S. Federal Reserve System’s Small Business Credit Survey, 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.
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. As this article will discuss, the first step is to figure out why your bank turned you down (e.g., insufficient credit history). Armed with this knowledge, the second step is to find an alternative lender who is more lenient toward your company’s particular situation (e.g., is willing to accept a lower credit score (yes, businesses, like individuals, have credit scores)).
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.
HELPFUL TIP: You have the right to know. Under the federal Equal Credit Opportunity Act (implemented by “Regulation B” or “Reg B”), 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. See 12 CFR § 1002.9(a)(3)(i).
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. See 12 CFR § 1002.9(a)(3)(ii).
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.” See 12 CFR § 1002.9(b)(2).
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:
- Too new or insufficient credit history
- Poor quality of earnings and/or cash flow
- Insufficient collateral
- Too much debt already
- Low credit score
- Weak business performance
- Other (size of company, customer concentrations, size or availability of personal guaranties, insufficient management team, weakening industry)
HELPFUL TIP: Did you know that business, like individuals, also 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.
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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.
However, as the next section explains, 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.
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.
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 (see above for the common reasons), there is a loan program out there for you.
SPOTLIGHT – LOAN PROGRAMS: We highlight some notable, creative programs
Was your business credit score too low?
- Some lenders have less stringent credit requirements and are willing to accept low scores that a more conservative bank would not otherwise entertain.
Was your company’s level of debt considered too high?
- Some 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.
Are you looking for a higher loan-to-value ratio?
- Some lenders are willing to accept loan-to-value ratios as high as 90% to offer you the higher loan amount you are seeking.
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
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 ).
SPOTLIGHT – CLOSED DEALS: Here are examples of how we helped businesses that were previously turned down by their banks, obtain commercial loans
On behalf of a marketing executive looking to switch careers and open up his own gym, we obtained a $744,000 purchase loan, combined with a business line of credit, to allow his startup company to build the gym and acquire exercise equipment.
On behalf of an auto body repair shop who was previously turned down for a loan by four other lending institutions (due to poor credit issues such as collections and an IRS tax lien), we obtained a $619,000 purchase loan to allow the company to purchase the building it had been renting.
To read about our other success stories, click here.
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.
Continue exploring our “Bank Turndowns” series:
To access all the volumes in this series, go to our “Series” page here.
David A. Krebs is a licensed mortgage broker offering commercial and residential loan programs beyond your regular bank. Call us at 321-239-2781, click here to submit a message, or click here to book a free consultation.