Why rejection can be a great tool to securing a loan for your business

It doesn’t have to be a total loss when the bank turns down your request for a loan to expand your business. When you take the time to explore why your application was rejected, you can boost your odds of gaining approval the next time around.
“You are entitled to ask questions and get answers,” says Cynthia Tung, senior vice president and relationship manager at Bridge Bank. “It could be liquidity, debt services, net worth or lack of collateral. It could be a variety of things. Once you know the driving factors of your rejection, you know the gap you need to bridge and you can develop a strategy for the next time.”
In addition to getting your own strategy in order, it’s often helpful to know what products banks are offering, as well as the approach they’ve taken to help companies similar to yours.
Smart Business spoke with Tung about best practices to follow when seeking a loan for your business and the role that character can play in the decision-making process.
What are some steps you can take before you meet with a bank about a loan?
Prepare to answer questions that will facilitate the credit assessment by the bank.
Typically, banks will require historical financial reports, including your most recent report as well as projections for the next three to five years. You need to have capable financial and accounting functions in order to get these reports prepared and organized for the bank to review.
Another important step is your plan. It should include moderate detail about why you need the loan and what the additional funds will support. You need to demonstrate how this line of credit will help your company achieve these goals. What kind of contribution would the investment make to your business? Include numbers and projections in your report that back up your findings.
Banks are really looking at performance. If you cannot provide a logical plan and a rationale for how the loan will help you, it will be difficult to secure the additional funding.
How do you pick the best bank for your needs?
You should talk to multiple banks, not just one, even if that one is the bank your company uses for its deposits.
Different banks may have different expertise and niche product offerings and you need to see what’s out there and determine which bank best suits your needs. Get some references from your other service partners ­— law firms, CPA firms or insurance brokers. Figure out who is more reputable and who you feel most comfortable working with to secure the loan that you need.
How much weight do banks place on character?
Many banks will look at the five C’s of banking: character, cash flow, capital, collateral and conditions. These are the parameters that banks often use to analyze a company’s credit profile. The first point, character, is a very important consideration for a bank that is reviewing a loan application or request for credit.
Your company’s character and reputation in the industry could play a big part in whether you ultimately get the loan. Banks will do research and look for unpaid debts, litigation or other issues that may affect your status. You could have a profitable business and have the ability to repay the loan, but if there are reputation issues out there, it could hurt your chances.
What can you do to overcome past problems?
If you have corrected past issues and you have a story to tell about how you did it and how those actions helped your company restore its reputation, it will only help your cause.
Explain what happened, show the actions you took to solve the problem and demonstrate what is happening now to keep that from being an issue again. Prove that you have turned the tide on what was once a difficult situation. If it wasn’t a problem of reputation that kept you from getting a loan, try not to take it personally.
Understand that there are other banks that may have a different view on taking risks. ●
Insights Banking & Finance is brought to you by Bridge Bank