When the Bank Says No

by Jeff Wright

Why do Banks Deny Borrowers?

During this time of uncertainty, you may find that traditional banks are tightening their credit requirements, making it harder to obtain the working capital you need to operate your business.

Banks in the Business of $$$

Bank Says NoEven before the coronavirus wreaked havoc on the economy, banks were looking for at least one year of profitability and positive cash flow before they considered approving a loan. You must remember that banks are in the business of making loans and making money, but their underwriting standards can make it tough to get approved. It can be frustrating when you believe you are on the right track to profitability and do not have the support of your own bank. The reasons may not make sense to you, and it does not solve your need for working capital financing.

There are a number of reasons a bank will turn down a request for financing, including:

  1. Limited operating history
  2. Poor personal credit score by principal owner
  3. Company is in a turnaround situation
  4. History of operating losses
  5. A weak balance sheet with high leverage
  6. Conducting business in a down industry
  7. High concentration with one debtor

If you have exhausted your own money and that of your family and friends, what’s next?

Where Do You Turn?

Other options to finance your working capital needs are with an asset-based lender, like Hitachi Business Finance. Our asset-based financing leverages your business assets to provide immediate availability to money. Asset-based lenders focus primarily on the quality of the collateral and character of the management team, rather than how long a company has been in business or the strength of the balance sheet.

Asset-based lending allows you the opportunity to fund your immediate cash needs or take on new jobs that you would otherwise have turned down. Without it, you could risk losing an existing customer to your competitor or missing out on developing a new business relationship if you don’t have any financing secured. The incremental sales will more than cover the additional cost of funds. Also, and often the most important with the business owner, no ownership interest or control of your business is required with asset-based lending. You remain 100 percent in control of your own company.

Third party investors can also be a source of financing. Angel and venture capital groups invest in companies with a unique product or service that show potential for significant growth and returns. Their due diligence period can be up to six months before they commit to any financing. With these groups, you will likely have to give up some ownership interest and control of your business.

If you have purchase orders but cannot finance the purchase of the inventory or pay the overhead to get the product or service completed, a P.O. lender can be a source. Their rates, however, may exceed 20 percent because of the perceived performance risk in funding the P.O. through completion.

When the bank says no, consider the alternatives. Identify the cost and benefits of each. In the short term, an asset-based lender can finance your immediate needs in a timely manner while you focus on growing your business.

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About the Author

Jeff Wright has been with the Hitachi team since 2006 and contributes more than 30 years of experience in the banking and commercial finance industry. He is currently responsible for business development in the Midwest region, and works with businesses and their trusted advisor network to provide factoring and asset-based lending services. Contact Jeff at (248) 259-3749 or jwright@hitachibusinessfinance.com.
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