Maybe it is a midwestern thing but lenders around here have a hard time just saying "No".
Let me lay out a scenario for you:
- Client comes into my office and tells me about the ultimate business opportunity.
- We discuss the costs and determine whether the client has the resources and qualifications possible to successfully launch this venture.
- Client completes market research and we write a business plan and financial projections based on sound assumptions.
- Client goes to bank(s) and presents business plan.
- Bank drags their feet, hems and haws, comes up with things that need to be fixed in order to do the loan.
- Client fixes problem and fulfills requests.
- Bank drags their feet, hems and haws…another list…repeat
- Weeks pass with no forward motion.
- Client gets frustrated and gos to another bank.
- Client gets loan with no troubles.
This routine always costs the entrepreneur time and usually it costs some money, whether in the form or burned cash or opportunity cost. Now, somewhere between number 4 and number 7 above the scenario should have changed. Someone, namely the commercial lender, should have said; "No thank you I am not interested in your request."
So how do you know if you are getting the runaround? There are some tell tale signs that a lender is not interested:
- They ask for an unreasonable amount of equity or collateral to reduce their exposure.
- They say that a non-present third party won’t approve the loan - usually a "credit board", "underwriters" or "the SBA".
- They question your abilities to run the business successfully - not specific criteria being met but just unsure about your personal abilities.
- They don’t get back to you promptly with a response usually within a week.
Some of the items on the above list can be legitimate.
For example if you have a project that has very little in Fixed Assets than a larger equity investment may be required. But I have experienced cases of fully collateralized loans where the lender wanted 35% equity or more where generally 20% would be sufficient.
There are other cases where a commercial lender told a client the SBA requires 30% equity to get the loan. Interesting, because the SBA’s policy is to; "not decline loans for lack of equity or collateral reasons". When I called the regional SBA office I was told they had not even received an application. We then called the bank back and pressed the issue and were told it was the banks "internal SBA department" that had made the 30% equity requirement.
Sometimes a decline is legitimate. Sometimes they have a competitor in their portfolio already or they just don’t like your project because they have been burned on a similar one in the past. Sometimes it is not about you or your business but the lender’s personal feelings. In that case you just need to find another bank.
I can only venture a guess at why a lender would want to string potential borrowers along by not just saying "No". My first inclination is that they are afraid of making the client mad and loosing their other business. If that is the reasoning, I believe they would loose far fewer clients by being honest and up front with them. Or in any event they will probably loose their business anyway when they switch to the bank that gives them a loan, a common courtesy.
I would like to suggest lenders learn to say one of three things upon final review of a business plan:
- Yes let me write up the paperwork.
- Yes, if…
In the "Yes, if" scenario they could require more equity, more collateral, an SBA guarantee or some other criteria. But, it is important that there is a "Yes" behind that "if". Then when the criteria is met there is not a second string of criteria to be met.