Why did my deal get declined? This is a common question that we get from our clients. While the economy seems to be tightening, there are common ways that borrowers can understand what lenders are looking for and avoid being declined for small business financing. In this article we review thousands of declined lending applications and narrowed 23 specific reasons for why small business owners get declined for small business financing.
By Thomas Tramaglini, Chief Operations Officer
More Loans Are Declined Than Approved
While small business owners apply for financing for their small businesses, more deals are declined than won. From 2019 – 2021, over 60% of small business owners who applied for financing through our platform were denied for one of several reasons. From over 3,000 deals submitted we pulled together a list of common reasons for why lenders decline small business owners for business financing.
The Goal
The goal that any lender has is to get paid back on time. What reasons for decline really amount to is the risk of whether or not the lender believes that they will be paid back on time, in full. The greater the instability in the bank statements or financials, the greater the risk. Simply put – when the lender gets paid back, they make money.
1. Judgements, Defaults, and Negative Payment History
When a lender sees that the borrower has had a negative payment history, defaulted on a loan or advance, or received a judgement its usually an automatic decline. We have written extensively on this in the past and more information can be found here.
When a lender finds any type of negative payment history in the past it is usually an automatic decline.
Lenders have become smarter than in the past with finding negative payment history through data clearing houses like CLEAR, LexisNexis, and Chex Systems. The alternative lending industry also has Data Merch which helps share between lenders who has had
negative payment histories in the past.
2. Decline in Revenue
Most lenders use your previous 3 to 6 months of revenue to evaluate the financial health of your business. If your decline in revenue declines by 10% or more lenders can suggest that revenue is not stable, and you may not be able to pay back what you owe. Some industries are seasonal, and the lender may ask for more bank statements to gauge lendability. Some lenders will customize payments so that seasonal businesses can pay based on the average revenue of the season which they are in. Some lenders will also cut the amount they will lend if there is a decline in revenue.
3. Business Owner Has a Cash Business
We see many small business owners have some or most of their revenue in cash. This can be done to minimize tax exposure or just because its easier to not go the bank. Yet, when revenue is not in statements, lenders see that as risky behavior and if a default occurs then they may not get paid back. The moral of the story is to make deposits and stay away from having a cash business if your intention is to borrow money.
4. The Owner is Not the Owner
Most lenders who fund small businesses make sure that the businesses are owned by who is requesting the financing. Most lenders ask for things like the small business’s EIN letter or K-1 to show proof of ownership. When the owner cannot demonstrate proof of ownership, it demonstrates risk or in some cases fraud. They important thing is that most lenders want a majority owner to be responsible for the loan or advance, so they are paid back.
5. Business is Not in Good Standing
Many lenders want to ensure that they are dealing with a business that is in good standing with their state of registration. That is, have they fulfilled their reporting requirements of their state, paid their fees, and done what is needed to ensure that their business can legally operate in their state. If a business is either not in good standing or forfeited, most lenders will allow businesses to rectify the issue. However, in some cases the borrow has not maintained their business for too long which can cause a decline or in some instances the business to not be in business (or authorized to do so) causing a decline.
6. More Money Out than In
When lenders review bank statements they can easily see that when more money is going out than coming in, the company is losing money. Unless the company has great balances on the bank statements, it is likely that the deal will be seen as weak and declined.
7. Behind on Mortgage
Some lenders ask for a recent mortgage statement from the borrower. When a borrower is late on their mortgage, it demonstrates risk to the lender and could mean doom for the deal. Lenders want to see small business owners being able to pay their bills.
8. Borrower Fails to Say that He or She Took One or More Advances in the Past 30 Days
When one applies for a loan or advance from a lender, the lender wants to ensure that the borrower is going to be able to afford the obligation. When a borrower presents bank statements to a lender, approvals are based on the average revenue of expenditures and spending patterns therein. When an approval is made and then a month to date or during bank login its demonstrated that the borrower took another advance (or more than one) the deal is likely to get killed. No lender wants to give an approval and then see that the borrower has taken money. This suggests risk and likely becomes an instant decline. Some lenders will allow an advance but not knowing about it is a reason for decline.
9. Borrower Took One or More Advances in the Past 30 Days
Most lenders have rules where they will not fund a borrower if they have taken on funding in the past 30 days. Unless the withhold is in the range of affordability, that is the amount that a merchant pays cumulatively is within the allowable range by the borrower, most deals showing funding taken in the past 30 days will be killed. Lenders see this as risk and an indicator of future decline.
10. Amount Borrow Owes is Too High
If a borrower already has 20 -40% of their monthly expenditures going out to pay debt, especially on advances or loans the lender is likely to decline the deal. Owing too much is an indication that the business may fail, or money borrowed may not be paid back. This may be indicated by the lender saying there is no room, or the borrower is over the withhold limits.
11. Borrower is in a Reverse Consolidation Program
Some small business owners who have multiple loans or advances may be in a reverse consolidation program. When they are in a reverse consolidation program, the lender provides weekly deposits into the small business’s bank account so the borrower can make its payments. As payments fall off when paid off, the amount paid daily to the reverse consolidation lender does not decrease. When most lenders see a reverse consolidation in the borrowers’ statements they run. When a borrower in a reverse is funded, the reverse lender usually automatically stops their deposits, still requires to be paid back, and in most cases provides penalties for breaking their contract. Without the influx of funds the borrower will have a hard time making their payments and in many instances defaults. So, when lenders see reverse consolidations, they decline.
12. Previous Stacking
When a lender sees a borrower take two or more advances or loans at the same time its is called stacking. When underwriters gauge risk and the lender makes an offer, it’s based on the information in the statements that were provided. When a borrower is seen stacking or taking more than one offer at the same time lenders will not want that to happen to them so they will decline the deal. The lender also sees that even if the borrower is not stacking on the lender now, they may take another advance later on which would bring on more risk to the lender and suggest a decline is in order.
13. Too Many Insufficient Funds of Negative Days
When bank statements are presented and they show some or lots of negative days, it suggests that lenders may not be paid back. Most lenders have rules for how many NSFs or negative days they will allow. However, make no mistake – if there are NSFs in statements it is going to be a killer.
14. Negative Trade or Landlord References
One thing that we saw was that after a deal was approved, it was killed because lenders will check references from time to time. Landlords and trade references are asked about their experiences with the client. If the client is difficult to work with or has a negative history with the trade reference or landlord, the lender may kill the deal.
15. Non-Business-Related Expenditures
Many of the upper tier lenders will scrutinize the expenditures on business bank statements. If business bank statements demonstrate there to be expenditures which are not business related it can suggest risk to the lender. Here are some expenditures that brought on declines over the past year from lenders to our clients:
Too many trips to restaurants – meals are not typically what lender want to see in business bank statements so too many expenditures for fast food or lavish restaurants can bring about a decline.
Visits to stores for personal purchases.
Trips to adult entertainment establishments. Just a no-no. However, about 4% of our applications
Payments for things like personal mortgages and cars can bring a decline. For instance, if you are a trucking company and you have a BMW payment in your statement it can draw attention.
16. No Financials Available When Lender Asks for Financial Statements
For deals that are larger, most lenders will require financials. That is, a current profit and loss statement, a well as a balance sheet. When small business owners cannot produce financials, it is a sign of weakness to lenders. Financials provide the business owner a level of granular attention to operations and when larger deals are in the works, the lender would want to 1) know that the business has a grasp on its financials and 2) has positive balance sheets showing cash on hand and the business’s ability to service the debt.
17. Tax Liens
Although tax liens are not a deal killer two instances have caused deals to be declined. The first is that the borrower has liens which are excessive. For instance, if a lien is over $200,000 or whatever the threshold is for the lender it will bring an automatic decline. Also, an automatic decline may occur if the lender finds that the borrower has a lien but there is no payment plan intact.
18. Settlement in Statements
Sometimes, borrowers who have had difficulty on previous loans or advances and chose to use settlement companies to settle their debt. Not that this is the end of the world, but when a lender sees that they borrower has payments coming out on their statements to a settlement company it raises a red flag, and an automatic decline. If a company uses a settlement company, it demonstrates that the borrower could not make its commitment to the lender.
If a borrower cannot or could not make its payments previously then why would a lender lend any funds to the borrower?
19. Recent Bankruptcy
While some lenders will allow borrowers to fund if they have had bankruptcy, most borrowers require the bankruptcies to be discharged or closed before funding. Some lenders have time requirements such as funding after 2 years following discharge. If a borrower has a bankruptcy which is very recent, it indicates that they may not pay back their financing.
20. Failure to Allow for Decision Logic or Bank Login (authentication)
Part of what most lenders do before funding is they authenticate a borrower’s bank account. Such a process ensures that the borrower is not negative in their bank account, that they have not taken another advance, that their statements provided to the underwriter can be confirmed, as well as the account and routing numbers are correct. One would not want funds to be sent to the wrong place.
When a borrower refuses to comply with the authentication process, most lenders will automatically decline the deal. There are a few lenders like Wide Merchant Group who does not require decision logic or bank login, but most companies want to do authentication because it makes their transaction safer.
21. Failure to Pass the Merchant Interview
Most lenders conduct one or a series of calls with a borrower before their funding occurs. The content of these interviews can range from purpose of using the funds to specific questions about businesses. When deals get killed during the interview, the main reason is that the borrower has not been honest about something from the past, what his or her intention is for using the funds or demonstrating the want to pay back the funds.
22. Criminal History
Most lenders will shy away from borrowers who have a negative criminal history. Some lenders will specify infractions not allowed in their review as well. For instance, borrowers who commit burglary or fraud are going to get declined by just about every lender. Some lenders will fund those who had a drug charge 7 years earlier. All capital crimes are a decline. The safe thing to say is that if a small business owner has a negative criminal history, he or she will have their deal declined.
22. Fraudulent Bank Statements
With photoshop (and other software) and the ability for borrowers to doctor bank statements, we see fraudulent bank statements regularly. Few fraudulent statements get to funding. With good underwriting, as well as bank authentication, lenders can smell fraud in statements relatively easy. Few people who try to provide fraudulent statements have the skill and ability to provide statements which look authentic and can pass meta-data checks.
Obviously, when fraudulent statements are found, lenders decline. There are times lenders may report this fraud to the authorities.
Contact Beacon Client Solutions to better understand your situation and how we can help you.
Dr. Thomas Tramaglini is the Director of Operations and Negotiation for Beacon Client Solutions, a company that supports small businesses on a host of fronts, especially MCA debt. Thomas has been a small business owner for many years, as well as held leadership positions in several organizations and companies. Thomas holds a B.A. in History, as well as Masters and Doctorates in Organizational Leadership from Rutgers University, The State University of New Jersey.
Disclaimer: Beacon Client Solutions is not an accountancy, or a law firm. We are business consultants. While Beacon works with outstanding attorneys and accountants, we cannot and do not provide legal or tax advice. All of our work is connected to those who are legally certified to give such advise. Beacon does have a longstanding body of work in MCA resolution and understands what small business owners deal with, specific to MCA. Beacon Client Solutions serves clients in all 50 states, Puerto Rico, Mexico and Canada.
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