Friday, October 30, 2015

Loan declines are tough on everyone

Loan approvals are fun, aren't they?  You get to give the good news to your borrower that the loan was approved and he or she is going to realize their dream of owning or expanding their own business.

It is a great feeling to share the news.  When we hear our clients get approved, we want to high five a big "YES", and it does not even matter the size of the loan.

What about those that are declined?

It is tough to deliver the bad news that a business owner may face a tough stretch.
Or that he may not be able to expand until he pays down some debt.
Or the business may miss out on an opportunity and end up closing.
Or the entrepreneur may need to put plans on hold to gain some traction or other investment.

As business advisors, we share in your disappointment when a loan is declined. Our clients are usually pretty bummed out and in some cases, upset because they had invested so much time and energy into a loan application only to have it turned down.

Here is an interesting read on reasons businesses are turned down for loans.

While we know that all loans are not created equal and that some loans should not be approved, here are three things that might help in preparing your borrowers for the loan process:

1. Explain the loan process and timeline. 

We spend a lot of time educating our clients as to what a bank will expect and preparing them to apply for a loan.  In numerous cases, our clients do not realize how long a loan will take.  It is very helpful if you inform them what to expect, how the process works and especially how long an approval or denial will take.

To a borrower, the only thing more discouraging than a decline is to hear nothing at all.

2. Be realistic.  

Before the borrower applies and it is clear there is not enough capital or collateral, be up front and inform them what the bank expects.

I had a client that had received four declines when she first arrived.  She was trying to buy a franchise for around $200,000 and only had about $2,000 to contribute and no business experience. She was surprised when I explained that the declines were likely due to not having enough cash contribution and no business experience.  In this case, she did not understand the terminology that was noted in the decline letter.

If they get a quick denial, they may be unhappy, but will be thankful to you for saving them time in the long run.

3. Encourage without being overly optimistic.

Customer relationship management is vital to your bank. It is difficult to not share in a client's enthusiasm or want to cheer them on as they apply.  Some borrowers misinterpret encouragement for approval.  An honest and timely decline is good customer relations.

We have observed that our clients that have had a lot of positive reinforcement such as, "This is a great idea", "This looks like a slam dunk" are hit harder by a decline than those in which the banker was up front and cautious.

Every loan is not a good fit for every bank

Recently I had a client get approved for a loan to buy a business that he had been managing for six years.  The owner wanted to sell to him and I helped him with some cash flow projections.  He was a little shy on his cash contribution, and yet the bank was able to work with him and the seller on an alternative solution.  He finally got the details ironed out, but he said, "I'm just struggling with how a small business can ever get started with so much money needed down."

Economic conditions, business experience, cash and many other variables can impact a loan decision. We can all help by providing ongoing education and expectations about what it takes to start, run and expand a small business.