What To Do If You Are Turned Down by The Bank
Being turned down can happen to anybody and despite all the careful planning. Any number of things may go wrong. Government regulations might affect the process. Erroneous information on a credit Quarterly Report may be another source. Before you try again, it is important you find out why you were denied approval in the first place.
Request a written response from the lender detailing in writing the reasons for denial of the loan. The letter should specify any credit Quarterly Reports used in evaluating the application and, of course, detail the primary reason(s) for the denial.
Talk with your loan officer.
- Ask your officer whether the loan amount was inappropriate and did it exceed the legal lending limit?
- Was the problem in the presentation?
- Did you not know answers to questions about costs and profits?
- Were there problems with your businesss financial status or projections?
- Are you talking with the proper loan officer?
- Find out: Is the loan officer comfortable with your business? Does the lender understand what is unique about your business? Does the lender have a bias towards manufacturing versus service-oriented businesses?
- Is experience a problem? Would the lender be more likely to provide financing six or twelve months down the road? Do they understand your management teams expertise? Is there something missing in terms of managerial experience?
Go to the Higher Level
If youve gone back through your presentation and are convinced your loan was denied improperly, ask to speak to someone with greater authority at your lending institution. Handle this with kid gloves so as to not cast a dark light on your original loan officers.
Are you using the right lending source?
Not all lenders are alike. Each has its own characteristics. Here are some key differences.
- These banks are targeted primarily to consumer business. They typically include:
- Multiple locations.
- Emphasis on individual banking services (checking and savings accounts, CDs, credit cards, etc.)
- They are typically oriented towards the community they service.
- Have typically lower lending limits (e.g. can easily do a $50,000 loan- but $300,000 is beyond their scope).
- Loan officers key on personal service.
- Their loan portfolio is typically mortgage loans (car, house, boat, small home equity) and typically at a higher cost.
These banks are oriented towards providing services to businesses. Their features include:
- Handling larger loans (e.g. $l million on a regular basis).
- Have fewer locations with regional rather than local offices.
- The Lender typically has a broader understanding of business and financial matters.
- The emphasis is on building long-term business relationships.
- There is typically a more direct relationship between loans and deposits.
Finance companies raise money from investors, banks, and other money sources rather than by taking deposits. There are three basic types:
1. Consumer or small loan companies typically lend money to consumers under the small loan laws of each state.
2. Sales finance or acceptance companies buy retail and wholesale debts from automobile and other capital goods dealers.
3. Commercial finance or commercial credit companies make loans to manufacturers which are secured by inventory, A/Rs or equipment.
Features typically found in Finance Companies include:
- Make loans on thing they are willing to buy (specific collateral).
- If the borrower defaults, they repossess and resell the collateral, making the fees paid up front as profit.
- There are typically much higher fees and/or interest rates.
- They have lower qualifying requirements than most banks.
Credit unions are nonprofit cooperative savings organizations. The members own the credit union. Members typically have a common bond such as employer, neighborhood, same union. Features include:
- An informal, close-knit environment.
- Consumer services are provided such as savings, checking, time deposits.
- They provide the smaller consumer oriented loans, many instances not over $5,000.
- They have tax advantages and thus can offer lower loan rates.
How to Improve Your Chances
Analyze your business closely with an eye towards improving collections and minimizing costs which will increase cash flow. Take a look at these major areas.
- Can I change my billing procedures to improve the timeliness of collections?
- Can I offer discounts for prepayment or within l0 days?
- Are you investing your excess cash right away to maximize interest earned?
- Are you carrying perpetual late payers?
- Are you experiencing production, delivery, or shipment delays?
Letter of Credit?
A letter of credit from another person or business may help secure financing. The LOC is typically acquired from a bank which will charge about l% of the amount of the letter of credit. Banks may require you keep a balance at their institution equivalent to the amount of the LOC.
Call on a Professional.
A CPA can prove to be an invaluable resource in helping you prepare the loan package and to explain various accounting procedures. The added credibility of a third party professional can make the difference between a lender accepting your figures or doubting them.
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