While there are several standout episodes of Seinfeld – such as the one about Festivus (for the rest of us), being the master of your domain, and who could forget Kramer’s obsession with black market shower paraphernalia – perhaps the most memorable meme that the show has contributed to popular culture is the notorious soup chef, and his declaration that because of bad behavior there will be (let’s all say it together) “no soup for you!”
Well, it turns out that bank managers are Seinfeld fans because they have a favorite phrase when looking at small business loan applications: “no loan for you!”
Indeed, although the Great Recession (mercifully) ended about a decade ago, big banks are still only approving about 15-20 percent of small business loan applications. As noted by Forbes: “Banks remain more risk averse in the recovery then they were prior to the recession.”
And so, much like the DVD commentary to discover the backstory behind the soup chef and his negative ways, let’s peel back the curtain and reveal the three reasons why banks say “no loan for you!” – and even more importantly, what to do about it (and don’t worry, Newman isn’t part of the solution).
#1 Low Credit Scores
Nobody’s quite sure how credit scores went from being what is essentially an arbitrary tool created by private organizations, into a sacrosanct metric that determines small business fortunes and fates. However, the fact remains that banks insist on excellent personal and business credit scores before they’ll even consider doling out a small business loan.
Unfortunately, there are two big problems with this requirement. The first problem is that according to an analysis of data from credit bureau Experian, nearly one in three Americans have what is classified as “impaired” credit – i.e. a score lower than 601.
And the second problem is that many business owners have no idea that they even have a business credit score in the first place – and as such, they’ve never asked suppliers and vendors to dutifully inform the credit bureau of their trustworthiness.
#2 Not Enough Business History
For reasons that even a seven-year-old would find curious, banks have taken the position that two years is the “line” between a new business and an established one. Is this scientific? Did some Chamber of Commerce or government study reveal this?
No, no and no. But that’s beside the point. The fact remains that unless they have at least two – and sometimes more – years of verifiable business history under their belt, banks smack applications with the “come back when you’re no longer a start-up” stamp.
#3 Not Enough Collateral
All bank small business loans are secured, which means applicants must pledge collateral in the event of a default (or even the building blocks of a potential default).
The problem here is that banks also control the valuation process, which usually means that assets are undervalued, and would-be borrowers need to pledge even more personal and business assets. Those that can’t do this, or don’t want to do it, won’t be having soup anytime soon.
Finally, Some Good News
Thankfully, the news isn’t all bad. Whether you need a working capital loan, a business line of credit, merchant cash advance, medical equipment financing, or any other funding product, you’ll likely get a warm reception – rather than the cold shoulder – by exploring the alternative financing marketplace.
While your total cost of borrowing might be slightly higher compared to a conventional bank loan, the speed and flexibility of alternative financing make these lenders appealing.
Instead of panicking when a bank says “no”, now you have options to give your small businesses a quick and sufficient cash infusion!