Article by Roger Schlueter
Always be open to Bankers Cues (Suggestions or Ideas Given). He is telling you how he wants to finance this deal. Usually the more good things that are in a borrowers favor like: Equity, Cash Flow, Collateral, Longevity, Etc. the more interested the Banker will act. The Banker wants Commercial Loans that he can get approved. He does not want to take the time to put together a project and then have a boss or Committee tell him that this loan should be Declined because it does not fit the Banks Credit Criteria or does not fit the Risk Tolerance of the Bank.
Banks can in reality Decline a Commercial Business Loan for almost any Reason except for Red Lining (not doing loans in a particular area). These loans are not regulated by the same set of regulations that a Home Mortgage is subjected. Banks can decline a Business Loan for almost any reason like: they don’t like the business model, they don’t think you can achieve the projected Sales or Earnings, the borrower does not have enough experience, lacks collateral or is not trustworthy.
Reasons I have run into include the bank did not like the Dirty Trucks of the business. The Bank thought the Cap Rate given by the Appraiser was too high. The Bank did not Know Enough about the Urgent Care business even though the facility was several blocks from a major branch of the bank. A Home Mortgage Lender in St. Louis (Ray Vincent) used to advertise and say the bank would not approve your loan because of the way you combed your hair. Banks really would not use this reason but Commercial Lenders can use very subjective ways to Decline Your Loan. Commercial Lending is not covered by the same rules as the Residential Market.
I recently had a client that wanted an $80,000 Loan to buy a business. The owner of the Business she was buying was going to take bake a note for the remaining $60,000 for a total purchase price of $140,000. The collateral was low ($80,000 of Equipment) and we figured the bank would ask us to finance the project with a SBA 7a Guaranteed Loan. We knew they would probably want an SBA Guarantee Loan before we talked to him, but in talking about Collateral, the banker stated that their bank would lend 70% on Equipment. We had $80,000 worth of equipment so he stated he could only give us credit for $56,000 for Collateral Value and then use the SBA for the remainder.
The Cue was the Lending on 70% of Equipment. I asked, would you lend us $56,000 on the equipment without the SBA Loan? The answer was a pretty confident, Yes. We decided to ask him for the $56,000 secured by $80,000 of Equipment. We felt we could get the seller to increase his amount for a total Seller Loan of $84,000. He needed some value info for the Equipment but we moved that way only because of the Cue he gave us in our meeting about lending on 70% of Equipment Value.
The lesson is to listen to the Lender about what he can and can’t do. He sometimes will tell you how the bank looks at deals such as yours and will usually give Cues as to How to Get the Deal Done at his Bank. Remember Banks can use almost any reason to decline a business loan but will usually tell you what they can do, and if you are listening, you can pick up valuable information about how this bank will look at your business loan.
Please contact me at roger@rogerschlueter.com or go to my website for additional information at schlueterfinancial.com