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Business loan approval rates at banks - What are they?

Updated on March 30, 2013

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Business loan approval rates at banks

You need a business loan and are considering going to a traditional bank. You are probably doing so because they are familiar to you, the terms are very good and you believe you are going to be approved, or very likely to be approved. However, what really are the approval rates at banks for small business loans?

The reality is that approval rates at most banks for small business loans, on average, are far lower than most people believe. Are the approval rates 50%, 60%, or 40%? Not even close. On average, the approval rates for small business loans at traditional banks are much closer to 10%, possibly even less. Having worked at the branches of a large national bank for several years, this is a quite unknown and very surprising fact. There are several reasons for this and once these reasons are considered, it becomes clear why the decline rate is so high and the approval rate is so low.

Banks are very highly regulated. A significant part of this regulation prevents, or hinders them from making risky loans. The regulations do not stop them, but in most cases, is a strong impediment. These regulations may be different than regulations on the investments that banks make with their depositor funds. Banks have loan guidelines they adhere to, which by all accounts, are very conservative. They do not want to put depositor funds under undue risk. This is a major factor that causes their loan guidelines to be conservative.

Banks typically require at least 3 major things for business loans, and all 3 have to be very good. The owners of the business have to have good or excellent credit. This generally applies to all the owners totaling up to 80% of the ownership. Generally, credit scores begin a 680, though to get approved for any significant amount, the scores need to be over 700. Even with scores this high, the bureau itself needs to be close to blemish free. Generally, any collections, significant slow pays, charge offs, even those that are for small amounts and are aging, result in a credit based decline.

The bank wants the collateral to be strong collateral. They may not require it, but they prefer liquid collateral such as Certificates of Deposit that are on deposit with the bank, or listed stock or bonds. If this is not available, they are interested in getting commercial real estate, accounts receivables and equipment that has significant value to it, such as construction equipment. The difference between the banks and many other lenders is that the banks will often look to put a blanket lien on all furniture, fixtures and equipment. This means that they want all of the collateral that the business has. The problem with the borrower agreeing to this is that if the business gives the bank virtually all of collateral they have, they will not have anything, or very little to offer if they need financing in the ensuing two or three years or longer. This puts businesses in a difficult position going forward. Good strong companies may very well have financing needs ongoing, sometimes close to an annual basis. By requesting all of a business's collateral for one loan request, a lender would be putting a company in a position where they may only be able to get 1 working capital loan until that loan is paid off, which can easily be 4 or 5 years.

The final requirement that banks have that often causes difficulty for companies to meet are financial statements. Banks typically want at least 2, often 3 years of financial statements. This often causes a problem for companies. Many companies use strong accounting firm that arrange their financials to show very low net income or almost a $0 net income. If a company's net income is very low or $0, it becomes much more difficult to get approved with a traditional lender. Since many companies have good accountants working for them, this will be a detriment to many companies when they go to seek funding. Talk to your accountant about showing a net income on financial statements for financing purposes down the road. Many accountants do not even consider this or discuss this with their clients, even though they should.

When seeking financing, consider as many sources of financing and as many types of financing as possible. Some alternative lenders or programs may have raw terms that are higher than the bank's terms, but not have other very undesirable conditions the banks require.

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