Friday, August 15, 2014

Small Business Lender Reveals biggest reasons why small business loan applications are declined.

I asked my friend Florence Rose to write a short guest piece on why she declines some of the applications she receives.  This brief glimpse of what goes on in the underwriting process of an institutional lender can give us all great ideas if we ever consider making our own investment into a small business.

Why decline a loan application?  
I grew up in a world of Entrepreneurs. It is what I know.  I breathe, eat, sleep and drink entrepreneurship.  All of my post-secondary education is focussed on every element of Small Business Entrepreneurship and Entrepreneurial Finance.  

 Why do I turn down loans?
 My compensations are partly driven by financing successful businesses and contributing to a strong economy.  Throwing money at businesses, that in my experience will fail, does no good for anyone.  No good for the entrepreneur, the financier, or the economy.  I want to contribute to a healthy economy.  I want to finance Entrepreneurs who will be successful.  My instinct is dead on, as is my education which contributes to good decision making.

 Why do I decline loans?
 1.       Poor credit and lack of investment – All research about loans of $250K and under are conclusive; if you don’t manage your personal credit well, you won’t manage your business credit well.  If you don’t pay small bills on time, you won’t pay me on time.  If you haven’t managed your personal wherewithal you will not apply sound judgement to your business.  It is one in the same.  

2.       Managerial Incompetence or Lack of Cross Functional Management Team – Just having functional expertise is NOT enough.  I can be a great plumber but if I don’t have small business management skills, I won’t make it.   Being a functional expert is NOT enough.  Either you are great at administration (the other half of business) or not.  If you are not, you have some options.  First, partner with someone who has the ‘other’ functional expertise in business.  Second, hire a great consultant to address your education gaps.   Third, stay employed at your current job.  Sometimes a great plumber is just a great plumber.  Not always are they great Entrepreneurs.  Be smart enough your strengths and weaknesses.

3.       You run out of cash – Cash is King.  If you don’t have #1 or #2 under your belt, then you will have challenges with your billing, collection, and payment of cash.  Again, don’t drive the Porsche if you don’t plan to fill it with high octane gas. 

4.       No market – You might have a great idea in business, but if there is no-one to sell your product/service to, you can’t generate cash.  Don’t over estimate your market if you are starting a business.  If you are sure you have clients to purchase your product/service too, get them to put it in writing.  These sales can be used as the basis for your cash flow forecast.

5.       Make a solid business plan with SMART objectives – Specific, Measurable, Achievable, Realistic, and Timely.  Know who you are, what you do, how you will do it, and make sure your operating plan is congruent with your strategic plan. 

Florence Rose is a small business credit specialist and can be reached at  Florence helps entrepreneurs in Southeastern New Brunswick, Canada.

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