If Your Banker Turns You Down . . .

Most businesspeople have been turned down for a business loan at least once in their careers, and it can be a wrenching experience. If your loan request is refused, don’t panic. Your company will probably prosper, even without the extra cash. However, you have some work to do.
The first task is to find out why you have been turned down. Ask your banker directly. Ask for specifics; don’t settle for a vague answer, such as “undercapitalization.” You can’t correct the situation unless you know what is wrong. Most loan requests are turned down for one of the following reasons:
1. Poor communication. If you and the banker don’t hit it off, the chances for your loan drop precipitously. Solution: Ask to be serviced by another loan officer. You have a right to expect that the person serving you will be empathetic about your problems.
2. Uncontrolled expansion. Banks shy away from a company with a revenue growth rate that surpasses its ability to finance necessary expansion. Solution: If you want to finance an expan¬sion program, make certain that your business plan includes a full explanation of how your company expects to keep pace with sales growth.
3. Overly optimistic business plan. Your bank will check your sales and earnings forecasts against industrywide forecasts and may also match your projections against those of a company in a similar business. If your forecasts appear too optimistic, your loan will probably be turned down. Solution: Keep forecasts realistic, even conservative.
4. Past misuse of loan funds. If you use funds for a project not in your statement of purpose and the bank finds out, your chances of receiving another loan from that bank are slim. Solution: If circumstances beyond your control make it impossible to fulfill loan conditions, inform your bank at once.
5. Rapid inventory buildup. To a bank, a sudden surge in inventories means one of two things: poor planning or an unanticipated drop in sales. In either case, there is reason to hold off new credit. Solution: Make sure your inventories are in reasonable shape before you apply for a loan. Don’t expect the bank to finance inventories above the range you normally carry.

No bank enjoys turning down a loan request. Apart from the fact that the bank makes money by lending funds, the bank understandably wants to be viewed favorably by its customers and prospective customers. Therefore, if you are turned down, you probably have the full sympathy of your banker at that moment. You might be able to use that sympathy as a bridge to your next move, by asking for your banker’s help with such questions as: “What would you do if you were me?” or “What source should I try now?”

Loan Guarantees From the SBA

If you are turned down for a loan by your banker, you may apply for a loan guarantee by the Small Business Administration (SBA). Provided you meet certain risk requirements, the SBA can guarantee the loan. (In cities with a population of 200,000 or more, you must be turned down by two banks before applying for an SBA loan.) If you have a good relationship with your bank, it will process your loan through the SBA. This will require a great deal of documentation, including the usual business financial statements, plus the following: a current personal financial statement from all holders of 20 percent or more of the company’s common stock; a business plan covering the period of the loan; and a list of all collateral, including the estimated market value of each item.

In the past, the attractiveness of SBA-guaranteed loans had dimmed because of the seemingly interminable amount of red tape and the time it took to get the loan approved. The SBA has become more innovative in attempting to reduce that lead time. In particular, a new program, dubbed the Preferred Lenders Program (PLP), can cut processing delays dramatically. PLP loans frequently can be processed in two to three days.

How PLP Works
One reason for this faster processing is that the Preferred Lenders Program turns over most of the paperwork to the bank lender. Whereas in prior years the principal responsibility for approval rested with the SBA, the PLP transfers that responsibility to the bank making the loan. Participat¬ing lenders can determine eligibility, creditworthiness and loan structuring, as well as make other decisions on their own, without prior review or consent by the SBA.

Under the Preferred Lenders Program, the amount of loan guaranteed by the SBA cannot exceed 75 percent. This compares with a guarantee rate of 90 percent on previous SBA programs. If your area is not served by participating PLP lenders, keep in mind that the SBAstill continues to operate its Certified Lenders Program (CLP). Under the CLP, participating lenders trained in handling SBA loan applications can obtain a decision and loan document package from the SBA within three working days. For more information about these and other programs, contact your local SBA office or visit www.sba.gov.