Banks Won’t Lend When You Need It Most—Here’s Why
Why don’t banks lend to businesses that need money?
That’s a question I have been asked many times and wondered for the first several years of my business life. There is a secret formula they use to determine who is eligible for a loan. It’s a compounded answer to make things a bit more difficult. Boiled down, they want to know how they are going to be paid back with interest (their profit). The compound aspect is they want to see cash flow sufficient to sustain payments AND assets to liquidate if they don’t get paid back. Everything really falls into that simple answer when you analyze it.
First: Cash flow. Lenders typically want you to have 1.2 times the cash flow needed to cover your monthly payment. For example, if your monthly payment is $1,000, you should show $1,200 in cash flow available before taxes, interest payments, or depreciation/amortization. (Depreciation applies to tangible assets, while amortization is similar but for intangible assets—both reduce your taxable income.)
Well that knocks out the majority of people trying to borrow. If you have poor cash flow to start, you’re usually having trouble paying your monthly bills, rent and payroll, let alone have their new payment PLUS and extra 20%. Yes, they want this available BEFORE they give you the loan, not after. Good try though.
Wait…there’s more. The second part of their magic formula is how they hedge their bet. If you DON’T pay, they want to know you have sufficient assets such as accounts receivable, machinery and equipment, contracts, PERSONAL ASSETS, etc., to cover the whole amount owed under the loan.
I know, doesn’t sound very friendly does it? But when you think about it, it makes sense. You don’t want to trade dollars with your product or service. If indicators like past performance, lack of profit, lack of cash flow, declining sales and so on exist, you wouldn’t want to do business with your customers either. If you don’t do at least credit checks on new business, you’re running a risk you don’t need to.
The good news? There’s a way to turn this around. We help business owners clean up their financials so they meet lending standards and increase their chances of approval. Our Business Health Index tests give you a clear picture of where you stand for borrowing—what’s strong, what needs work, and where banks are likely to say “yes.”
From there, we can match you with lenders that fit your current financial situation, or even help you structure low-interest repayment plans, often with single-digit rates, to get the funding you need without overwhelming your business.
If you’ve struggled to get a loan or aren’t sure what banks are really looking at, we can guide you step by step. Don’t wait—let’s put your business in the strongest position possible so you can get the capital you deserve.
