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What to Do When the Bank Says No

What can you do if the bank turns you down for a loan? Regroup, and review the following questions:

1. Does the company really need to borrow now? Can cash be gener­ated elsewhere? Tighten the belt. Are some expenditures unneces­sary? Sharpen the financial pencil: be lean and mean.

2. What does the balance sheet say? Are you growing too fast? Com­pare yourself to published industry ratios to see if you are on target.

3. Does the bank have a clear and comprehensive understanding of your needs? Did you really get to know your loan officer? Did you do enough homework on the bank's criteria and their likes and dis­likes? Was your loan officer too busy to give your borrowing pack­age proper consideration? A loan officer may have 50 to as many as 200 accounts. Is your relationship with the bank on a proper track?

4. Was your written loan proposal realistic? Was it a normal request, or something that differed from the types of proposals the bank usually sees? Did you make a verbal request for a loan, without pre­senting any written backup?

5. Do you need a new loan officer, or a new bank? If your answers to the above questions put you in the clear, and your written proposal was realistic, call the head of the commercial loan department and arrange a meeting. Sit down and discuss the history of your loan effort, the facts, and the bank's reasons for turning you down.

6.   Who else might provide this financing? (Ask the banker who turned you down.)

In any case, you should be seeing multiple lenders simultaneously to prevent running out of time or money.

Beware of Leverage: The ROE Mirage

According to theory, one can significantly improve return on equity (ROE) by utilizing debt. Thus, the present value of a company would also increase significantly as the company went from a 0 debt-to-equity ratio to 100 percent. On closer examination, however, such an increase in debt only improves the present value (given the 2-8 percent growth rates) shown by 17-2 6 percent. If the company gets into any trouble at all—and the odds of that happening sooner or later are very high—its options and flexibility become very seriously constrained by the covenants of the senior lenders. Leverage creates an unforgiving capi­tal structure, and the potential additional ROI often is not worth the risk. If the upside is worth risking the loss of the entire company should adversity strike, then go ahead. This is easier said than survived, however.

Ask any entrepreneur who has had to deal with the workout special­ists in a bank and you will get a sobering, if not frightening, message: it is hell and you will not want to do it again.

Conclusion

Business cycles impact lending cycles with more or less restrictive behavior. But existing businesses with solid financial performance are better suited for debt capital than start-ups, especially when the econ­omy is emerging from a recession. Managing and orchestrating the banking relationship before and after the loan decision is a key task for entrepreneurs.

Notes

1. This section is drawn from Jeffry A. Timmons, Financing and Plan­ning the New Venture (Acton, MA: Brick House Publishing Company, 1990).

2. Ibid., p. 68.

3. Ibid., p. 33.

4. Ibid., pp. 68-80.

5. Neelam Jain, "Monitoring Costs and Trade Credit," Quarterly Review of'Economics and Finance 41, no. 1 (Spring2001): pp. 89-111.

6. Ibid., pp. 81-82.

7. G. B. Baty, Entrepreneursbip: Playing to Win (Reston, VA: Reston Publishing Company, 1974); J. M. Stancill, "Getting the Most from Your Banking Relationship," Harvard Business Review, March/April 1980.

8. This section is drawn from Timmons, Financing and Planning the New Venture, pp. 85-88.

9. Ibid., pp. 90-94.

10.   Baty, Entrepreneursbip: Playing to Win.

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