Top 5 reasons that commercial financings are declined
February 27th, 2014
In Frank’s travels across the country, he spoke with a number of lenders on the subject of commercial loans and learned a lot about how they view the applications that come across their desks. He learned that when loan applications get turned down, it is generally for one of the following five reasons. For the most part, these are common to most types of financing, whether it is equipment, credit line, acquisition, expansion etc. It is interesting to note that across these several lenders, the reasons did not vary by much. Here they are, not in any particular order:
1. The clients were unprepared. They had not made themselves familiar with what the lenders needed to have. The documentation required was incomplete causing the lenders to send for more information, usually more than once. Then every time the lenders picked up the file, they had to reacquaint themselves with the project, given that they are always working on several deals at any one time. Deals died from “deal fatigue”
2. The clients were knocking on the wrong door. They were seeking financing that belongs in the arena of venture capital firms not a conventional lender. Lenders are not looking to shoulder the risks that are normally associated with shareholders
3. There was too much reliance on SBLs. For a while borrowers were spurred on by the SBL program and the related government guarantees which limit the borrower’s risk. However, the cost and the difficulties of recovering the guaranteed portions make this method of financing very unattractive to lenders. Simply, they don’t make enough money on them. They want “skin in the game” from the borrowers.
4. No Back-up plan, or Plan “B”. The lenders said they look to the “rainy” day. They want to know whether the borrowers have plans if something unforeseen happens. Everyone knows that plans rarely go according to plan. What will happen if sales are disrupted for a week, or a month? It happens. They pointed out all the airlines, hotels and restaurants that took a hit during the SARS crisis. The events of 9/11 precipitated the fall of the airline, Canada 3000.
5. The business cases for the projects were weak, or bad. Sometimes this was because they were poorly explained. In other cases, the borrowers were unable to demonstrate that benefits warranted the additional debt load. A symptom of this was often unsubstantiated projections. The lenders felt that the projections were made by simply determining what was needed to carry the debt.
And finally there was one reason that was not voiced, but was clearly implied. Sometimes, even if all the above were OK; the decision makers just didn’t like the deal. One of them equated it to publishers: several will reject a manuscript and one may take it up and make it a bestseller.
So the message is clear, do your homework and persevere. Good luck, with your search for financing.