Smaller businesses may not show a profit because the owner takes any surplus as personal income or they purchase business assets: surplus revenue turns into a operational expense.

The lender has every reason to be concerned about a businesses' profitability. They do want you to be profitable and they need to hear how funding will increase your profitability: make sure you do so in your funding proposal.

Asking for too much money.

Lenders want their ratios to be

A 'No' can provide a valuable learning experience, one that can lead to an eventual 'Yes'. There will be many a 'No' in your business life so get used to it ; continue to be the optimist (a requirement for any successful entrepreneur) you always were.

How to handle a 'No'.

Start off by not getting mad, defensive, or hurt. Make sure you do not get angry as you may have to deal with this lender in the future!

Do ask, politely, why your funding request was turned down: this is your chance to learn.

Hopefully they will give you specific reasons. Take notes and ask reasonable follow up questions i.e. make the most of this 'training'.

Listen very carefully and you might discover that the lender's concerns can be overcome. You may have the opportunity to adjust your proposal and get your funding.

It may be a big and resounding 'No', one without or with an insufficient explanation such as 'We are presently restricting our loans to certain sectors.'

A "No' without explanation can mean that there are fundamental problems with your business and/or the proposal. An unqualified 'No' will require you to analyze your proposal with a critical eye and may even require you to have an independent party review your proposal.

Here are some common issues that a banker or investor may or may not express to you.

Not enough owner equity.

This issue is unlikely to be 'hidden' and most lenders will point out that you do not have enough equity at stake. Why should they take the majority of the risk? Why are you not willing to invest more of your own cash and/or attach valuable property/assets to secure the loan?

There are many good reasons not to attach personal assets to secure funding especially jointly owned assets such as a home. Do not rush into placing your personal assets, especially your home, at risk. The lender will take your home if the loan defaults and the stress of such a seizure can ripe apart your family!

That said it is not unreasonable for a lender to request more than 'sweat equity' from you. If you are not willing to place a significant investment in your own business then why should any lender?

The business is not yet profitable.

Why would a bank or lender be interested in a business that is not producing a profit?

Why are you in a business that is not profitable?

There is a significant difference between not being profitable and not being able to meet operational and inventory expenses! Profit is the difference between the total revenue of a business and the total of all the business' expenses.

Industry specific averages do exist and bankers and investors will refer to them when they do their due diligence. There are many sources where industry information can be obtained the most recognized being Dun and Bradstreet.

Smaller businesses may not show a profit because the owner takes any surplus as personal income or they purchase business assets: surplus revenue turns into a operational expense.

The lender has every reason to be concerned about a businesses' profitability. They do want you to be profitable and they need to hear how funding will increase your profitability: make sure you do so in your funding proposal.

Asking for too much money.

Lenders want their ratios to be m

Listen very carefully and you might discover that the lender's concerns can be overcome. You may have the opportunity to adjust your proposal and get your funding.

It may be a big and resounding 'No', one without or with an insufficient explanation such as 'We are presently restricting our loans to certain sectors.'

A "No' without explanation can mean that there are fundamental problems with your business and/or the proposal. An unqualified 'No' will require you to analyze your proposal with a critical eye and may even require you to have an independent party review your proposal.

Here are some common issues that a banker or investor may or may not express to you.

Not enough owner equity.

This issue is unlikely to be 'hidden' and most lenders will point out that you do not have enough equity at stake. Why should they take the majority of the risk? Why are you not willing to invest more of your own cash and/or attach valuable property/assets to secure the loan?

There are many good reasons not to attach personal assets to secure funding especially jointly owned assets such as a home. Do not rush into placing your personal assets, especially your home, at risk. The lender will take your home if the loan defaults and the stress of such a seizure can ripe apart your family!

That said it is not unreasonable for a lender to request more than 'sweat equity' from you. If you are not willing to place a significant investment in your own business then why should any lender?

The business is not yet profitable.

Why would a bank or lender be interested in a business that is not producing a profit?

Why are you in a business that is not profitable?

There is a significant difference between not being profitable and not being able to meet operational and inventory expenses! Profit is the difference between the total revenue of a business and the total of all the business' expenses.

Industry specific averages do exist and bankers and investors will refer to them when they do their due diligence. There are many sources where industry information can be obtained the most recognized being Dun and Bradstreet.

Smaller businesses may not show a profit because the owner takes any surplus as personal income or they purchase business assets: surplus revenue turns into a operational expense.

The lender has every reason to be concerned about a businesses' profitability. They do want you to be profitable and they need to hear how funding will increase your profitability: make sure you do so in your funding proposal.

Asking for too much money.

Lenders want their ratios to be

Not enough owner equity.

This issue is unlikely to be 'hidden' and most lenders will point out that you do not have enough equity at stake. Why should they take the majority of the risk? Why are you not willing to invest more of your own cash and/or attach valuable property/assets to secure the loan?

There are many good reasons not to attach personal assets to secure funding especially jointly owned assets such as a home. Do not rush into placing your personal assets, especially your home, at risk. The lender will take your home if the loan defaults and the stress of such a seizure can ripe apart your family!

That said it is not unreasonable for a lender to request more than 'sweat equity' from you. If you are not willing to place a significant investment in your own business then why should any lender?

The business is not yet profitable.

Why would a bank or lender be interested in a business that is not producing a profit?

Why are you in a business that is not profitable?

There is a significant difference between not being profitable and not being able to meet operational and inventory expenses! Profit is the difference between the total revenue of a business and the total of all the business' expenses.

Industry specific averages do exist and bankers and investors will refer to them when they do their due diligence. There are many sources where industry information can be obtained the most recognized being Dun and Bradstreet.

Smaller businesses may not show a profit because the owner takes any surplus as personal income or they purchase business assets: surplus revenue turns into a operational expense.

The lender has every reason to be concerned about a businesses' profitability. They do want you to be profitable and they need to hear how funding will increase your profitability: make sure you do so in your funding proposal.

Asking for too much money.

Lenders want their ratios to be

That said it is not unreasonable for a lender to request more than 'sweat equity' from you. If you are not willing to place a significant investment in your own business then why should any lender?

The business is not yet profitable.

Why would a bank or lender be interested in a business that is not producing a profit?

Why are you in a business that is not profitable?

There is a significant difference between not being profitable and not being able to meet operational and inventory expenses! Profit is the difference between the total revenue of a business and the total of all the business' expenses.

Industry specific averages do exist and bankers and investors will refer to them when they do their due diligence. There are many sources where industry information can be obtained the most recognized being Dun and Bradstreet.

Smaller businesses may not show a profit because the owner takes any surplus as personal income or they purchase business assets: surplus revenue turns into a operational expense.

The lender has every reason to be concerned about a businesses' profitability. They do want you to be profitable and they need to hear how funding will increase your profitability: make sure you do so in your funding proposal.

Asking for too much money.

Lenders want their ratios to be

Smaller businesses may not show a profit because the owner takes any surplus as personal income or they purchase business assets: surplus revenue turns into a operational expense.

The lender has every reason to be concerned about a businesses' profitability. They do want you to be profitable and they need to hear how funding will increase your profitability: make sure you do so in your funding proposal.

Asking for too much money.

Lenders want their ratios to be maintained especially the percentage of the collateral in relation the equity base of the business.

You may be able to get around this one with a little song-and-dance routine i.e. some restructuring of the proposal. Keep in mind that different lenders have different comfort zones; do not be anxious to lower the amount you really do need.

The business is too risky.

Lenders do have a 'no fund' list, businesses that they feel are too risky or objectionable.

This is difficult to overcome and usually requires you to try another lender, one who understands your industry and can evaluate the risks more objectively.

The business strategy is not valid.

How would a lender know if your business strategy is sound?

Experienced bankers and investors, especially those familiar with your industry, do have good 'intuition' and should be listened to. Inexperienced bankers and investors have many preconceived notions that really do not stand up to 'daylight'. The problem is to determine which category that your banker falls into.

If the former you should be willing to apply some 'brakes' to your business proposal and seek clarification before your proceed.

If the later just move along to the next institution.

Inadequate collateral.

Each lender will have their minimum requirements for collateral. Valuation of the collateral is based on what the lenders can achieve in a distress sale. While this type of valuation is highly annoying it is understandable: bankers 'sell' money and leave non-capital assets to a liquidator to sell.

You may be able to deal with this type of rejection by increasing the collateral available to the lender. Better still find a lender who understands your industry as they might be more objective about your business assets true market value.

Closing points.

Shop around and do not settle for the first offer.

Repeated failure to obtain funding clearly points to significant flaws in your proposal or business. Sometimes the only true solution is to cease operations before you get deeper into debt and waste more of your valuable time in a floundering business.

Alex G. Landels

Copyright 2001