Never Take No for an Answer

Does this sound familiar? You applied for a loan and the bank officer responded with the dreaded words, "I'm sorry, but..." and turned it down. Admittedly an unhappy scenario, it is not a unique one and happens to many businesses at some point.

Fortunately, you can turn what would otherwise be a negative rejection into a positive learning experience by taking steps to find out why the final answer was "no."

Personalize the Process

It helps to first become familiar with how banks actually process loan requests. If special circumstances apply to your business, describe them to the loan officer and ask what additional information might be presented to help your case. Openness about the particulars of your financial situation can help bankers look past the impersonal statistics.

If anomalies exist in your business or credit history, point out and explain them before making the credit application. This personalizes the entire process and helps to establish trust between bank officer and business. It is commonly said that bankers don't like surprises, and one of the worst surprises is discovering bad credit.

Why You Didn't Get the Loan

Banks most often deny credit because a business has:

• Bad credit. As noted above, a clean credit record is crucial in both business and personal finances. Anything else sends the bank warning signals about your likeliness of repaying the loan in a timely fashion - or at all.
• High debt-to-equity ratio. A typical ratio is three-to-one. Banks also look at other standard ratios for credit worthiness. In special circumstances, businesses that do not meet the usual standards may still be considered.
• Insufficient collateral. This is common for startup businesses that lack collateral or significant assets to pay back the loan if the company should experience hard times.

Other reasons may also lead the bank to reject a loan application. If yours is turned down, it behooves you to find out why the loan officer thought the proposition was too risky. The bank may even have suggestions on how to make your presentation more persuasive.

What Banks and The Government are Doing

Banks acknowledge the difficulty in getting credit, especially for small, startup, and special sector businesses. Through new programs, government loan guarantees, and private initiatives, however, banks are beginning to increase their loans to these segments. Under the Community Reinvestment Act of 1977, for example, the government began asking banks to make credit more available to small business owners in their own communities. Due to recent government pressure to take action under this Act, some banks have developed programs specifically tailored to the needs of small enterprises. First Interstate Bank, for instance, recently introduced its Community-Based Lending division. As Vice President Art Resendez explains, the task is to get the word out to loan officers about the Small Business Administration's range of loan guarantee programs.

The First Interstate division also works with special case loans. "Often we get loan applications that a standard analysis would tell us to reject," says Resendez. "But because Community-Based Lending recognizes and understands typical small business problems, often we can work with the SBA guarantee program to approve the loan."

Resendez also notes a relatively recent development for entrepreneurial financing - the Southern California Business Development Corporation. This is a joint project funded with $10 million from 24 banks to aid small companies in the state.

Union Bank, with 200 branches throughout California, has 70 commercial lending locations - or one in each community serviced - to assist business customers. According to Small Business Program Manager Larry Klaustermeier, "our experienced credit people sit down with each individual customer to understand their specific needs and circumstances. Our small business portfolio currently totals more than $1 billion."

"We also have a Women & Minority Assistance Program that, through a very hands-on process, deals with loans in the $20,000 range," continues Klaustermeier. "But the relationships we form extend beyond commercial loans alone. We try to create a total relationship with our customers, and can package everything from credit cards to residential and commercial real estate loans and trust accounts. This is part of our commitment to do as much as we can for the communities we serve."

Beyond Banks for Funds

Commercial banks or savings and loan (S&L) institutions are not the only source of credit. Other sources sometimes take on riskier propositions, albeit at a higher interest rate and possibly with a stake in the company. They may also be able to offer more flexible payback arrangements or alternative revolving loans that regular banks cannot.

Commercial finance companies typically offer revolving loans with a credit line based on accounts receivable and inventory. This is a flexible loan that allows the borrower to repay or borrow money daily, depending on the company's cash flow needs. Interest rates are usually one to four percent higher than on bank loans, but because the borrower can pay the loan as soon as a payment is received, interest is only charged on money actually used.

Evolving from a past reputation for granting only conservative loans, insurance companies have now moved into all areas of lending except short-term revolving debt. Most frequently they offer seven- to 15-year loans at an interest rate based on the Treasury rate plus a risk premium. Many insurance companies are also interested in buying into growing firms to offset inflation worries on their fixed-return investments.

Venture capital firms may be able to provide growth money for companies in a period of expansion. Although traditionally focused on larger enterprises, venture capital firms have been increasingly willing to finance smaller startup companies. Some firms require voting control before agreeing to finance a company, and most prefer to deal in equity securities or subordinated debt that is convertible to equity. The interest rate required is very high, generally from 35 to 50 percent.

Employee Stock Ownership Plans (ESOPs) allow a company to keep cash on hand while contributing to employees' retirement. Instead of contributing cash to the retirement fund, the business contributes stock. Not only can this have tax advantages, but employees may find that ESOPs provide more incentive to improve job performance because of their personal stake in the firm's success.