Why Won’t Anybody Lend My Business Money?
By Kim Blueher | March 28, 2011
Last week I spoke by phone to a gentleman who was looking for a loan for his business. He has a small retail business in rural New Mexico and has been in business for over 30 years. Sales over the past two years have been slow due to the difficult economy. The business is struggling. To make things worse, the week of the Big Chill in February caused significant water damage to his building and inventory. He needed $50,000 to replace lost inventory and repair the building. He called various government offices looking for financial help in the form of a disaster grant or business loan. He kept getting passed on to other resources and by the time he got to me, he was very discouraged.
He said his insurance would not cover the inventory and he couldn’t afford the $5,000 deductible anyway. The business has been losing money and he said his credit history was “terrible”. He has been unable to pay his bills and he didn’t have any collateral to secure the loan other than the inventory to be purchased.
I asked him if he could not pay his bills now, how could he ever hope to make the loan payment. He didn’t have an answer for that. He sighed and worried about his four employees who would lose their jobs if he had to close the business.
Unfortunately, in my position as Director of Lending at WESST, I have recently had more than my share of these heartbreaking conversations.
This business owner had run out of options. He has joined the group of small businesses who feel that if only they could get a loan, if only the banks would loosen up their lending criteria, if only someone would give them money, things would be alright.
There are several extremely important things to have in place to successfully apply for a loan.
In a growing economy, it is fun to start or grow a business because the demand for products and services is high. In a shrinking and recessive economy like the one we are in now, it can be frustrating to start a business unless you have done your market research and have proof that there are lots of people out there who want to buy what you are selling at the price you want to get for it.
Existing businesses may find their customers disappear. I work with several retail businesses who have decided to close their doors because sales have dropped so much. Consumers are looking for bargains and changing their buying habits.
In this environment, businesses that start to lose customers usually morph into something slightly different to meet a demand they have discovered. I know of a construction company who switched its focus from new construction to maintenance of existing buildings so clients could save money by simply repairing what they already have.
New businesses sprout up all over the place because entrepreneurs discover needs that didn’t exist before. I just met with a woman who has created a game to help people, both young and old, increase their knowledge of how the financial world works. Financial literacy is the big buzz word these days and she is perfectly positioned to take advantage of that.
The successful business owner comes from a place of financial strength:
- Maintain a good credit history. That said, people have bad things happen to them all the time and how they have handled their credit tells a great deal about their character. I spoke to a woman yesterday who legally settled a mortgage for less than she owed because she had a home she needed to sell but couldn’t get enough for it. The rest of her loans, credit cards, etc., were all handled perfectly. I told her I would be happy to consider a loan, even though she had this “ding” on her credit report.
- Don’t have more debt than you can handle. This needs no explanation.
- If you need to borrow money for your business, have collateral available to support the loan. If the business owner does not have available assets, it may be a smarter decision to focus on building personal/business financial stability and wait until that is in place before applying for a small business loan.
- Educate yourself about business finance. Understand financial statements and manage expenses carefully. I recently met with a woman who had owned a business for many years, wanted to borrow a small amount of money for business expansion, but had no idea what her business financial statements meant. She just kept track of sales and how much money she had in the bank. Actually, there are many business owners who operate this way, but when it comes time to ask for a loan, they will not be successful.
A business can have incredible market demand, a strong financial position, and still fail if management is weak. What do I mean by good management? (What are characteristics of good management?) Self confidence, innate wisdom, leadership, experience, attention to detail, boundless energy, the never-ending quest for knowledge, and most importantly, the ability to get right back up again after being knocked down. This does not have to be contained within one person. A smart business owner will build a team that has talents he or she may lack.
It takes the perfect storm to create a successful business and even then it may be hard to get money. I have a client who is a fantastic entrepreneur and has a profitable and rapidly growing business. She wants to expand to new markets overseas, but needs money to do so. Banks have lent money to her, but are uncomfortable lending any more. She is now looking at venture capital, which means she has to share some of the ownership of the business. The process is slow and she is learning a lot. She has a vision and is determined to see it happen.
Common Reasons Lenders Reject Small Business Loans
So, in a nutshell, what are the primary reasons lenders turn down loan applications?
- Too little owner’s equity
- Poor earnings record
- Weak management
- Startup or new company
- Low-quality collateral
- Slow or past-due credit/loan payment record
- Inadequate accounting system
If at first you don’t succeed…
If you’ve been turned down for a loan recently, work on building your business credit. Then, contact your local bank and apply again for a small business loan. Shop around to find a banker you can work with. How do you find a good banker? Ask around. Ask other business owners; ask your accountant or lawyer; ask your friends. Think of it as shopping for a business partner. A good banker is a great business asset.
WESST’s loan program offers an alternative to small business owners who generally don’t meet traditional lenders’ credit standards. As one of two certified lenders in the SBA’s MicroLoan Program in the state of New Mexico, WESST loan program helps entrepreneurs get small loans up to $50,000. The loans can be used for machinery and equipment, furniture and fixtures, inventory, supplies, and working capital, but they cannot be used to pay existing debts or to purchase real estate. Our program is unique because it assists borrowers who generally don’t qualify for traditional lenders’ credit standards.
Of course, this doesn’t mean that getting a loan from us is easy. The most basic eligibility requirement for our loan program is the ability to repay the loan from cash flow. We also look at your personal credit history, your industry experience or other evidence of management ability, collateral and owner’s equity contributions. We provide small business loans to women, minorities and other aspiring and established small business owners who meet our requirements. You’ll more information about the eligibility requirements for our small business loans in the Loans section of our website.
About the Author
Kim received her MBA in Finance from the UNM Anderson School of Management in 1982 and spent the next 8 years in banking as a commercial loan officer in Arizona and New Mexico. When WESST was started in 1990, she joined to set up the micro-loan program, which she currently manages. She also teaches some of the training classes in Albuquerque on business planning and financial projections. Kim is passionate about the outdoors, and spends as much time as she can running, hiking, snow skiing and fly fishing while attempting to manage her three teenagers and their father.