Why Do Banks Decline Business Financing Prospects?

It's not uncommon for us to get calls from companies that need business financing but have been declined by banks. Many of this prospects consider their experience of trying to get bank financing to be a sour experience. "They don't understand me. They have no idea how quickly my business can grow!" they complain. I am going to play devils advocate for a second and say that actually, many people don't know how banks lend.  And if they understood how banks operated, most of these prospects wouldn't have even bothered approaching a bank for business financing. Maybe it's the bank's fault for not making it clear.... perhaps.

Let's start by looking at the typical factoring prospect. Many prospects have less than three years of operations, though some have more. A number of them have no hard assets such real estate or equipment either for the company or personally the owners. And finally, a number of them are in turn around mode - meaning they are turning around a troubled business.

Now, let's look at the other side of things. Banks lend either against assets you own, exceptional performance or a combination of both. Period. To meet their criteria you must have assets, performance or both. This is a slight over-simplification but it works for my example. They want to see companies and owners that have solid balance sheets with assets that can be used as collateral. Remember: no assets = no collateral. Sometimes they can make limited exceptions to the asset rule, but in that case, they want to see outstanding performance showing a long track record of success. And of course, they will usually lend on a combination of assets and performance. However, the following applies:

• No assets (no shoes?)
• No Performance track record (no shirt?)
• No money (no service?)
• No exceptions

Now, if you look at the typical factoring financing prospect I described you will see that most will not meet the criteria to get funded by a bank - regardless of how hard they try. For these companies, they better option is to consider an alternate source of funding such as invoice factoring.