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Why Banks Aren't Making Business Loans and How You Can Change Their Minds

Given all the media attention to the recent plight of small businesses (any business for that matter) in seeking business loans, it is easy to get mad at banks for keeping their vaults closed tight regarding small business lending (a trend expected to continue in 2011).  However, regardless of what the media thinks, there are numerous reasons that banks are not lending to small businesses and some of these issues are out of their control.

First, most financial institutions are fearful of current and future government regulations.  For example, the credit card reform act of last year has really done nothing to protect consumers from crushing debt.  All it has done is make it more burdensome for credit card companies and banks to issue and manage these accounts.  In response, banks and other lenders are either passing along these new costs to account holders or telling potential borrowers NO.

Further, with the recent passage of the financial reform bill in 2010, banks and other lenders are sitting tight waiting until all the provisions of the bill are written into law and these organizations have the chance to see how the new bill will affect how they operate their businesses – especially in how they underwrite business loans.

Second, while we seem to be getting beyond the housing crisis and all the bad or subprime loans that defaulted in 2009 and 2010, we have yet to see the impact that similar commercial property loans and their impending defaults will have on our lending institutions.

Many banks and other commercial property financiers are still sitting on tons of bad commercial property loans; many that are already in default or approaching it quickly – especially since our so called recovery is barely inching forward.  Thus, until the banks can get a hold of their commercial loan portfolios, they will continue to hold tight the strings on future lending to small businesses.

Lastly, and most importantly, while banks and other lenders continue to see high demand for business loans they are not seeing very qualified borrowers.  Many business owners, hit by this recession have, over the past two plus years, seen their revenue and thus net income drop substantially as well as watched their personal and business credit scores crash and burn.  At the same time, mostly due to the factors mentioned above, banks have been increasing their lending criteria requiring higher levels of net income or cash flow and higher credit scores.

Take all of these factors together and you have the credit markets we are now in.  Very high demand and need from businesses seeking ways to survive and maybe even grow at the same time access to these capital markets drying up faster than an afternoon rain storm in the Mojave Desert.

While this may seem extremely bleak for your business, it does not mean that bank or alternative financing cannot be had.  It is just that the rules have changed and there are more obstacles in the way.  But, none of these rules and obstacles need to be fatal to your business.

There are three simple ways to get your bank or your lender of choice to change their mind regarding funding your particular business.

First, you must begin to understand financial institution's or bank's new lending criteria and work to improve your situation (personally) and that of your business to meet and exceed these new requirements.  Thus, if your bank states that all borrowers are required to have cash flow at least twice the monthly loan payment amount – then it is up to you and you alone to find ways to improve your business's cash flow position by either increasing revenue and margins or reducing costs.  Or, if your bank or lender requires your personal credit score to be 700 FICO or above then take the time now and improve your credit score.  It is really that easy.  Much better to spend your time and energy finding ways to put yourself in a better position to achieve an approval then to just waste that time and money in applying over and over again hoping that the lender will somehow change its mind.

Second, you have to demonstrate to these lenders that you (and your business) will do all that you (it) can and that you have done all that you can to this point.  This means showing that you have just as much skin in the game as you want them to put in.  This could come in the form of shedding your fear or dislike or reluctance to pledging personal assets and business assets as collateral as well as taking all the cost saving initiatives your business can like not providing management or owner salaries until revenue turns around.  Further, you might tap into savings and other retirement accounts for a capital infusion to help improve the business's revenue before approaching your lender.  Keep this in mind, no bank will loan your business hundreds of thousands of dollars (or even just thousands of dollars) if all you have at risk is your time.

Lastly, most investors (private investors) when looking at deals to fund look for reasons NOT to invest.  Thus, if they find one (even a very simple or small reason), they throw that deal into the trash and move on to the next one.

Banks act very similarly.  They look for reasons not to invest and if they can't find a reason to say no they then start looking for ways to make the deal work.  So, even if you have a great excuse why your credit is bad or your income is down, it does not matter, they will not listen as they have already turned to the next deal.  Thus, take away all of their reasons to say no and you will begin to get the approvals you are seeking and need.

The bottom line here is that even though business loans in this market are extremely scarce, you and your business can still get the funding you need to survive and grow.  It just takes a little work in making sure that your business doesn't have blemishes before applying.  Your first impression may be your only impression.

Further, if you are unwilling to take the time and better position your business for a loan before applying to your bank, then why would your lender think you will do it afterwards?

You can either find a way to make your business stand out before applying for a business loan or waste your time getting told NO over and over again.  The choice is yours.

About the Author

Joseph Lizio holds a MBA in Finance and Entrepreneurship, is the founder of Business Money Today, has a strong commercial lending background and is regarded as an expert in business and finance.

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