As a Business Owner one of the worst conversations to have with your Banker is getting knocked back for a loan. It can be particularly hard when you just need some short-term support or have an opportunity that slips between your fingers without the necessary financial backing.
Often these “Declined” conversations between a Banker and their Client is short and uncomfortable – after all most people hate delivering bad news and want to avoid conflict. But these events can be a rich source of information to build a better business & banking relationship. Here’s our Top Tips for dealing with a “Declined” outcome –
It’s important to get a clear and concise reason as to the specific reasons WHY your loan has been declined. Many Bankers will offer explanations such as “we’re not comfortable” or “it’s not within our appetite at the moment”. This is as useful as telling your 13 year old they can’t use the iPAD or Playstation“…..because I said so…”.
There are potentially hundreds of reasons why a Bank might decline a loan – but, broadly speaking these will fall into one or a combination of –
- Character – the Bank doesn’t think you have the experience, capability or track record to deliver
- Capacity – the Bank doesn’t think you are generating enough surplus Cashflow to support repayment of the loans/s
- Collateral – the Bank doesn’t think you have enough security to cover the debt IF you can’t repay it from cashflow
- Conditions – the Bank doesn’t think the wider economy is tracking well enough for you to take on additional debt
- Risk – the Bank sees some other risk (Political, Regulatory, Economic, Social, Technological, Environment, Legal, Management, Industry)
The second thing to understand out of a Declined decision is HOW the situation can be rectified…. that is to say, what actions can you take to overcome the issues highlighted by the decision?
Particularly important here is ensuring that both the Bank and you as a borrower are on the same page when it comes to understanding the “Capacity” piece. Every Bank takes a slightly different approach to determining the “Capacity” of a borrower to meet commitments. Some Banks use higher “affordability rates”, require evidence of servicing ability under a “business stress test” scenario or place little or no reliance on projected income streams.
We’ve seen dozens of examples where Bankers have (inadvertently) neglected income streams or cost saving measures when making “Capacity” assessments. It’s absolutely critical that this “Capacity” analysis is well understood by all parties.
The next item on our Top Tips checklist is to determine WHO has actually said “No”. The experience level of the ultimate decision-maker in the Banks is extremely varied and typically depends on the size of the deal.
The smaller deals (<$2M) can sometimes be assessed by software/AI models (computer says “no”!) and deals up to $5M are typically reviewed by an individual from an internal panel of Credit Managers/Analysts who may not understand your industry or specific business fundamentals or even be located in the same State as your business.
The other key thing to remember here is that your deal is only as good as the information being presented by your Banker to their Credit Manager. If your Banker seems a little aloof or uncertain of the details then you can take a guess at how well your application is being supported up the line!
4. DON’T PANIC
Our final Top Tip is DON’T PANIC!
It can be tempting to either run off and seek the easiest form of finance to get you over a hump OR accept the terms & conditions (i.e more security, new covenants etc) the Bank says you must comply with for them to consider over-turning their decision.
In our experience, these options usually end up with you paying higher rates & fees or agreeing to terms that you’d really rather not be lumbered with in the longer term.
Of course, the key is getting in early and having a clear Financial Roadmap to present to your Bank well before you actually need the funding. At STAC Capital we tailor Business Financial Roadmaps for our clients as a basis for ongoing engagement with Banks and other Funders – we set out the Business Plan and funding needs for businesses well in advance, detail the Character, Capacity, Collateral, Conditions & Risks and we ensure we get in front of the right people in the Banks to get a fair hearing & work together to unlock opportunities.