Top 5 Reasons for Business Loan Declines
Those of us in the Financial Services industry hear it all the time. Small business owners stressing over the lack of enough capital resources, particularly when it comes to borrowing money. There are many solutions to this problem, which I'll briefly mention at the end of the article, but I thought it useful for entrepreneurs to understand some of the reasons for lending institutions turning down requests for money, so that they can try to make their businesses attractive to lenders.
Credit Deficiency
Let's get the most obvious one out of the way first. Banks, being risk averse and regulated, have strict credit requirements for lending. These apply to both your personal and your business credit, usually measured by a credit score. Late payments, high balances relative to your credit limit, lack of any credit history,
collection accounts/judgements, excessive inquiries from applying for credit too often, and foreclosures/ bankruptcies damage credit scores. If your score falls below the bank’s minimum requirement you will not be approved for a loan.
Lending Limits
One area regulations addressed by banking regulations is lending concentration. Banks are not allowed to exceed certain percentages of their total loans for any one individual or entity. Similarly, they monitor loan concentration in asset classes, industries, and loan types (residential mortgages, commercial mortgages, asset based, lines of credit, etc.). Some banks forgo certain loan types altogether. If your loan request happens to fall outside of their current parameters/limits they cannot approve it.
Collateral
There are too many different reasons for this to go into, but if the type of collateral you offer as security for the loan is not currently acceptable to the bank they will not lend. This can change within each bank over time and does vary from bank to bank.
Portfolio Adjustments
Part of this goes back to lending limits, but it also involves risk mitigation and balancing of assets. Banks are continuously monitoring their entire loan portfolio to insure they comply with federal regulations, are appropriately diversified, and meet internal profitability requirements. That means that adjustments are continually being made by adding or eliminating types of loans they fund. As an example, the bank declines an application because they have too much exposure in that applicant’s industry.
aware of payment requirements. However, many contracts also contain
financial requirements and clauses that forbid certain actions or conditions. An example is maintaining a minimum
debt to income ratio. There are many others*. You may have inadvertently violated one of these covenants. That
prevents you from any further borrowing and may result in your loan being called.
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