After the Bank Says “No”

If you’ve been to the local bank looking for a small business loan, sat across the desk from a loan officer, and been told no, you’re not alone.

Although the bank around the corner has traditionally been where Main Street business owners found the capital they needed to fuel growth and expansion, it’s no secret to anyone that times have changed. Some of the change is the result of how bankers look at small business, but some of the change in attitude at the bank is the result of small business borrowers who have let their financial house fall into disrepair. That being said, small business owners have options, even if they don’t meet the profile most bankers are looking for.

If you’re one of the lucky 10 percent of small business owners who is able to get a traditional small business loan from the bank, congratulations—you need read no further. If you happen to be one of the 90 percent of Main Street business owners who left the bank frustrated and disappointed, keep reading. The following may help you regroup and prepare for the next go around.

• Get your financial ducks in a row—I’ve sat in your shoes before. Often it’s not about having a perfect financial history as much as it is demonstrating you have a perfect understanding of where you are and where you plan on going from here. Whenever I talk to lenders, they all seem to understand the last few years have been tough on small business. They also universally lament the vast majority of small business borrowers they see aren’t prepared with a plan that outlines why they are seeking funds, what they plan to do with those funds, and what they expect the positive results to be should they get the small business loan. If your current financial condition is good and you can successfully articulate a plan, in some circumstances, it might be worth going back into the bank—but that isn’t the case for many small business owners.
• Consider your options—Believe it or not, 71 percent of small business borrowers (according to Pepperdine’s most recent Private Capital Index) find the financing they need from friends and family. Of course this isn’t the only source of capital for small business, but if you’re in the idea stage with no revenues, it’s difficult to demonstrate to a lender that you will have the ability to repay the loan. Early and idea stage startups face unique challenges that are often not met by the local bank. I recently interviewed Ross McGarvey on the Business Fuel Podcast, an entrepreneur and immigrant who didn’t simply have bad credit, he had no credit history in this country. In addition to some investment by family and friends, he bootstrapped and traded his way through the first few years of his business.
• There are non-bank alternatives—Because access to capital is a challenge for most small business owners, the last few years have seen a number of what are often called “alternative lenders” enter the small business lending space. They offer specialized loan products like equipment financing, factoring, commercial real estate loans, along with factoring’s cousin—the merchant cash advance. Most alternative financing is designed to provide a short-term influx of cash, and with the exception of such vehicles as equipment or real estate financing, shouldn’t be taken on as long-term debt (at least in my opinion). Unlike the local bank, which enjoys a negligible cost of the capital they loan to small business, these alternative sources must acquire (buy) capital to lend to you—thus interest rates are higher than a traditional loan at the bank. Nevertheless, interest rates are favorable to using personal credit cards to access additional capital. And, access to capital—even at a premium—often makes the difference between success and failure.
• Don’t take “No” for an answer—I speak to small business owners and lenders every day. I’ve already told you what the lenders say, now let me share what the successful small business owners all say, “Don’t take no for an answer.” It’s tough to be turned down by the bank. It’s also tough to be turned down by more than one—or even alternative lenders. Every successful small business owner I talk to argues there is more than one way to skin…you know what I mean. You might need to adjust your plans for growth or you may even need to walk away from a potential opportunity because you don’t have the money to pull it off. I spoke with one entrepreneur recently who purposely only takes jobs she knows she can finance out of working capital. “Slow and steady wins the race,” she says. Granted, this isn’t the easiest course of action to take when great opportunities present themselves, but sometimes it’s what you’re compelled to do when you lack adequate capital.
• Get  you financial house in order—Sometimes the only thing to do is work on your credit. Bring your monthly obligations up to date and make moves to improve your credit worthiness. This will take time, but like all good things, it just doesn’t happen overnight.

If you’ve been turned down by the bank and have found success by any of the approaches listed above please share them here. If you’ve found success in other ways, I’d welcome your comments as well.

If you’d like to dig a little deeper into what you can do to prepare for your next conversation with a lender, clicker HERE.