Commercial Loans Blog

Why Does My Loan Get Approved at First and Then Denied Later?

Nothing is more frustrating to people trying to get commercial loans done then applying or sending a loan to a bank, getting terms and a letter of interest, then watch the process get delayed for weeks or months only to get a denial from credit committee. Why does this happen?

I have addressed this in the past, and last week I was reminded once again of it.  The truth is, that bank was quite possibly not lending from the get go.  Your loan never had a chance.  7 out of 10 local banks are currently not lending and the big 5 banks, although lending, are ultra conservative in what they lend on.  Over 80% of the loans I close were denied somewhere else first.  I am getting them done at normal banks with normal rates.  What gives?  How is that possible?

You see, a bank can not advertise, “we are not lending”.  They can’t even tell their Loan Officers and tellers-it would be a PR nightmare.  But behind the scenes, amongst the owners and/or bank managers and presidents there is another criteria that trumps whether the file is good or not, it is called the “Texas Ratio”.  Simply put, it is the amount of debt on the books compared to the amount of assets.  Once the ratio hits 1 to 1 they are on the “watch list” with the FDIC.  That means more audits, and possibly, the government taking over. 

Each weekend this year, 4-8 banks get taken over, their assets and liabilities quietly pushed off to other banks.  When that happens, the people who started the bank are left with a big old goose egg.  They lose everything they put into it. So, if a bank is close to that 1 to 1 it will not loan out any more money unless it is OVER collateralized.  They need to build assets and reduce debts.  So the underwriters and credit committee quietly deny every loan.  On the surface, they look like they are lending.  They issue term sheets and approvals.  You don’t know they are not until the process delays on, and finally they come back with some crazy denial.

I had to spend 30 minutes on the phone with a client this past week convincing him he was a quality client and that I could get him a loan.  I had issued him terms, it is a Firehouse start up.  He has great credit, has experience, assets, nothing wrong with him.  I close a couple of these a month-I have legitimate sources that are funding these loans.  I can get him closed.  Yet, he has been to 5 local banks and after initial thumbs up, got denied at all 5 and EACH ONE GAVE A DIFFERENT REASON FOR DENIAL.  That alone shows what I am saying is true-they are digging for reasons.  You see, the 5 banks he tried really were not lending-especially not business only which goes on the debt side with no corresponding asset.  There is nothing wrong with his loan, he just went to the wrong banks.  But that many denials had his confidence down.  He was considering no longer doing a Firehouse and giving up on his dream simply because of all the denials.  “Maybe it was not meant to be” he thought.  But he IS qualified, he CAN get done.  He just needs to go with someone who has legitimate sources that really are lending.  He needs to run with us.

Brian Peart