Why do banks say no?

To understand why banks refuse finance applications we will consider the following:

1. The three C's of lending
2. The business case
3. Bank Policy
4. Local manager authority
5. Understanding your business

 

1.The three C's of lending are Cash, Credit and Collateral

Cash

Cash is probably the most important of the three because without adequate cash or cashflow to repay any loan your bank will simply not be interested in lending you money.
Some will ask: "but surely if I have good enough security the bank will have no concerns about lending me or my business the money?"
The banks would rather not have to recover a debt by calling in a borrowers security so it is vital they are convinced any potential borrower has adequate cashflow to cover the repayments.

Credit

Sometimes referred to as "character" and is concerned with the credit history of the borrower. Those businesses that have repaid their debts in good time and within the terms agreed in the past will have a good credit rating and be considered a good credit risk. Those that have not will have a poor credit rating and be regarded as a bad credit risk.

Collateral

Collateral is the security the lender uses to cover the potential non payment of the debt. The risk to the lender is the possibility of default and the reward is the interest on the debt being paid. There is often a direct relationship between risk and reward i.e. when risk is high then interest will be high and when risk is low then interest will be low.

Every lender calculates a Loan to value Ratio (LTV) on the collateral being offered as they know that if they have to foreclose on a debt, they will only be able to reclaim a percentage of the current market value in a forced sale situation.
It is important to recognise that collateral never makes a bad loan good. The last thing a lender wants to do is have to foreclose on your collateral.

Three C’s Conclusion

There is always a balance between each of three C's when lending decisions are being made.

So why do banks say no?

• Capability of the borrower to repay debts out of cashflow are unclear or unproven
• Credit history is poor
• Collateral is insufficient to cover the debt

2. Could it be your business case?

Things to check:

• Does it make sense to someone outside of your business?
• Is it so long that the lender just could not be bothered to wade through pages and pages of text?
• Have you provided enough evidence for the claims you make about what you will achieve?
• Have you provided a cashflow statement that proves you can make the repayments?
• Have you provided a one page management summary which cleary outlines the case and the requirement?
• Does it look professional or has it been written on scrap paper?

3. The bank policy-Your bank manager may not have enough authority

Many local managers are only able to sign off very small loan amounts. Sometimes they need to refer the application to a more senior manager within the banking structure.

4. National bank policy may be acting against you

Banks and lenders have different policies regarding what they will and will not lend for. Certain industries are favoured by some lenders and some not.
You could be unlucky that your industry is not in vogue at the moment.
Policies also change from time to time. One month office investment could be in favour and the next month not.

5. You lender may not understand your business

It is just possible that the reason for your lender refusal to lend is they really do not understand your business. This could be down to your confused or unclear presentation or a business model that the lender is simply unfamilair with.

Tip: It's always useful to ask your lender if there is anything he is unclear about regarding how your business operates. If he then admits to being unclear about any particular aspect you can explain it again.


Part of the series: 'If the Bank Says No!'

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