4 Reasons You Did Not Get that Business Loan
In my 17 years of commercial banking, I think I have seen every type of loan request ranging from a request written on single piece of paper, to requests that consisted of a full multi page binder. At other times there were requests that were in person, on the phone, or via email.
Loans are generally processed through four stages: Application, Review, Underwriting, and Approval/Declination. Regardless of the manner in which a loan request reaches a lender, there are several main reasons that the request never makes it to the approval process.
- Incomplete Information
Just a few examples of incomplete information, which is the first and foremost reason a request is denied and often never makes it to an approval process, are as follows:
Incomplete tax returns; Income Statements with no Balance Sheet; Unsigned personal financial statements; and either no application at all, or one that is not filled out completely. No lender will be able to move to the next stage of an approval without complete and accurate information.
- Source of Repayment
An application that has no foreseeable and measurable method of repayment is the second reason that many loans never make it out of the application stage. A loan request no matter the amount of collateral must show that the borrower has the ability to repay the loan to the bank. Most banks look for three methods of repayment, such as cash flow from the project, cash flow and assets of the guarantor, and finally the liquidation of the collateral.
- Life of Asset
The third reason that loans do not make it to the approval process is when the request is mismatched in the life of the asset to the repayment time of the liability. A bank will not be prepared to lend money beyond the useful life of the collateral that supports the loan.
For instance, a customer wants to purchase a piece of equipment with a useful life span of seven years, but the borrower requests a 15 year loan in order to make the monthly payments affordable. The equipment would have no or very little salvageable value at year seven. If the bank had to foreclose at that point, they would basically have an unsecured debt. The secret is to match the life of the loan to the life of the assets.
- Use of Proceeds
Almost every application, or request has an area to explain the use of the funds from the loan request. Many borrowers either leave this part of the application blank, or put in a description such as “working capital.” The information needs to be as detailed as possible. For the purchase of an asset, the borrower should provide a full description and if possible a Listing Sheet for the item. The repayment terms need to match the use of the funds (see item #3 above).
These items above are only a few of the problems that a potential borrower may encounter when applying for financing. Other issues such as repayment cash flow, global cash flow, collateral analysis, business analysis, and closing costs and procedures can intimidate the borrower and cause loan declinations.
When it comes time to apply, seek out a professional for one on one consultation to help avoid these and other pitfalls.