Category: Asset Based Loan

On financing requests, the business checking account reference  is often requested.  Many business owners do not wish to provide it for privacy reasons.    Is it needed and is it helpful?

If the business checking account reference is requested, it is often a normal request and often not even checked.    In the past, it was standard procedure to contact the bank, verify the opening date, current balance, average balance, insufficient funds and overdraft history.

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More recently, the bank reference is not always checked, and the lender will decide if they want to do a bank account verification.   Even though the reference is still asked for in most cases, there are several reasons why the applicant should want to provide the reference and not feel it is a privacy issue.

Business Checking Account – other considerations

The applicant is approaching someone else and asking for something  – Many borrowers feel whether they should provide a business checking account reference is up to them.   They also often give an opinion if it should be relevant or not in the analysis.    Since the borrower is approaching another party and asking for something, it is really the right of that party to decide what to ask for from the applicant.

The bank information may be a strength for the applicant – Providing the bank info will not always be a weakness.   Provide the reference if your business has a strong business checking account reference information.   It will help their chances of being approved.  It may also help them be approved for a higher amount and better terms.

The bank information may be a weakness for the applicant – If the applicant’s business checking account reference is weak, it can hurt them and they should not voluntarily provide it if it is not requested.   Weak bank statements may include low beginning, ending and average balances.    It can also include NSF – insufficient funds and overdraft history.    If an account has any of these, it may hurt the applicant.

Privacy Concerns

Privacy Concerns – Privacy concerns are sometimes a significant issue.   This is understandable.   If the applicant has such concerns and their account statements are strong, they should consider resolving these concerns through other means.

The applicant should talk to the representatives further if they need to get a higher comfort level.    Research the company at the better business bureau and with the state to see if there is any negative information on the company.     If not, and the company has been verified, providing the checking account reference information should be acceptable.

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When it comes to applying for a business loan, businesses will often ask for an amount that is too high.    What amount should a business ask for, and what should they base the amount on?

One of the initial overall factors lenders look at to consider if a business will be able to handle the new debt and if the amount of the request is in line with the size of the company, is gross receipts.

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A business that has $100K in Gross receipts requesting $200K will have almost no chance at being approved for this amount of funding.   A business that Grosses $100K is likely in the “up to $25K” range for funding, unless they have significant unexpected strengths in other areas.  The lender will look at how much money the business grosses as a rough initial guide in determining if the request is in line with the size of the business.

A business that Grosses $500K to $1 Million is in a better position to be requesting $100K, and have a better chance of being approved for a larger amount of funding, even if it is not the full $100K they requested.

Having significant gross receipts will give a company the opportunity to be a candidate for higher funding amounts. However, a company’s net income may be negative, and if this is the case the negative net income may all but eliminate any strengths provided by significant gross income

While net income, debt to income ratios and other factors play a role in how much the company may ultimately be approved for, gross receipts will dictate the broad range of the amount of funding they are a candidate for.

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Among the decline reasons that seem difficult to accept, understand, and even have enough information on to figure out how to handle in the future, “too many accounts recently established”, or similar language, is one reason that leaves declined applicants at a loss.

This is a decline reason often assigned to applicants that have recently opened credit accounts of some type.   The lenders review the number of accounts recently opened, how long ago they were opened, the type of account opened, and possibly the limits.   There are very likely other factors as well they do not disclose.

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The lender believes the applicant has established or opened too many accounts too recently which they are not comfortable with.    They consider this type of activity and behavior by an applicant to be an elevated risk factor, and will often decline an applicant for this.

Whether this is a reason the applicant can accept or not, the bigger hurdle for a declined applicant is they do not know and will not be informed of exactly how many accounts are “too many accounts” , and in what span of time are they “…recently established”.

If the applicant calls the lender and speaks with a representative, they can be sure the representative does not know, will not be told, and will be unable to find out the answers to these very valid questions the declined applicant will have and deserves to know.   After all, if an applicant is told they are declined for certain specifications, aren’t they entitled to know what the parameters of the specifications are?

Certainly they are, however, they will not be able to find this information out, they will have to alter their behavior based on generalities.   All the declined applicant knows is they need to make sure they don’t apply for, or establish too many accounts too often.    Does that mean 3 accounts, 5 accounts or 10 accounts?    Does it mean in the last 3 months, 4 months, or 5 months?  Declined applicants will be forced to simply refrain from heightened activity as best they can.

This type of decline reason is common to many larger lending institutions and is not an aberration, so there are many applicants that are frequently declined for this reason.     The reason applicants will not be told the specifications is that it is considered proprietary lending guideline criteria by the lender, which they consider company secrets.    While this assertion can be disputed since applicants are directly affected by the criteria, applicants will probably get better results by simply making sound conservative judgements about how often they establish new accounts.

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Recently, a friend  asked if one of the decline reasons they received on a credit card decline was legitimate or not: excessive unsecured limits.

One of the reasons they were declined by the credit card issuer is that the lender believed the applicant had too much unsecured credit available, even though they were using approximately less than 10% of their availability.   Is this a legitimate decline reason?

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From the applicant’s perspective, they have not used the line that is available, so how can this possibly be used as a decline reason?  If they are not using it, that means they do not owe it.   How can they be declined in part for a non-existant debt?   This cannot be a valid decline reason.

However, from the lender’s perspective, it is money that is available at anytime to the applicant.    The applicant can get a cash advance, or may even have checks on hand against the line which they can simply write a check for and deposit into one of their accounts.

If the applicant encounters an event for which a significant sum of money is required, an illness in the family, elderly care, loss of a job,  damage to a home that is not covered, an applicant that had no intention of using the funds, may suddenly do so.   When such an event occurs, the applicant now has a significantly higher monthly debt obligation they are obligated to meet.

This monthly debt obligation may also be used in part to calculate their debt to income ratio, possibly resulting in their upper “limits” ratio to exceed the lender’s threshold, resulting in an additional decline reason.

One issue that is hard to distinguish is the possible incorrect inclusion of a revolving home equity line into the analysis.   Home equity lines are listed as an “R” for revolving credit by the bureaus.   Since a home equity line of credit is secured by the home, it is not unsecured and should not be included as part of an unsecured accounts review.     Often, since a home equity line of credit will have a high limit in comparison to credit cards, if it is included in the analysis, it will severely skew the true picture of the applicant’s unsecured accounts and availability.

Nevertheless, while being decline for “excessive unsecured limits” may not seem valid to an applicant, the lenders reasons for doing so are valid enough for them to legitimately justify their position.

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On personal credit reports,  trade lines are identified by the company reporting the information on the account holder.  As an example, the trade account may say “Sears” and Sears will report what their records show about your repayment history to them.

Imagine if an account were listed and showing slow or derogatory repayment history about you, but the company’s name is not listed. Hard to imagine?   That is precisely what occurs today with very well know business reporting agencies and how they report on businesses.

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One of the purposes of the business credit report is for other businesses, or the business itself, to review the trade and repayment history.    However, if a business reviews it’s own business credit file, reviews the trade section and identifies delinquent or derogatory repayment information, they do not know who the company is that is reporting on them.

For privacy purposes, company names of business credit reporting agencies will not be listed here.

It is even the case when the business credit reporting agency is called and a customer service representative is spoken with,  the representative will indicate they do not know, are unable to tell you, and unable to find out who the company is that is reporting credit on you, in spite the fact that the business credit reporting agency is receiving credit information from them, about your business.

It seems very clear that they do know who the companies are, even if the number of people that have access to that information is small.    Since the business credit reporting agency is receiving information, they will have to know who the company is reporting information concerning your company.

If this issue is encountered by a company reviewing their own business credit from a business credit agency,  it is recommended that a supervisor at the business credit agency is asked for and to make every effort not to relent, until this information is provided. Anything less could be considered a disservice to the business seeking information on their credit.

Cash flow loan programs, based on using business bank statements to assess the cash flow of a business, are available for a businesses. However, are they a fit for most businesses?

This will depend primarily upon the real time cash flow figures in the company’s business checking accounts, the company’s gross and net income, and the profit margin of the business.   The company’s bank account beginning, ending and average balances are important as they will influence the daily and monthly payment a company is able to make.   If a company deposits $25K to $50K into their account on a monthly basis, but their beginning and ending balances are approximately $5K, they will not be able to handle as high of monthly debt service as a company that has the same dollar amount of deposits per month, but higher beginning and ending balances.

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The company’s gross and net income figures are also a strong indicator of the type of financing they may be able to handle.    A company with gross receipts of $250K per year will not be able to handle the same monthly debt service as a company with gross receipts of $1 -$2 million.     The net income figure may also be closely tied to a company with higher or lower bank account daily balances.

The profit margin is also an important % to consider due to the cost of this type of financing is typically significantly higher than other types of financing.    As an example, a liquor store has a low profit margin, and may not be able to handle a higher percentage of financing of a cash flow loan.   The exception to this will be if the liquor store has a fast enough inventory turn around time.  If a cash flow loan is 30% per year and the merchant indicates the loan is too expensive because their profit margin is 20%, inventory turn around time has to be factored into the decision.

If inventory is turned over 1 time per year, then the cost exceeds the profit margin by 10% and the cost of financing is too expensive.

If the merchant turns over all of his inventory on an average of every 3 months, and their profit is 20%, 4 times a year will bring in an 80% return on money, far exceeding the cost of financing.   Other factors which need to be considered include the merchant having to reinvest in inventory, damaged goods, etc., but the top profit margin figure allows the merchant to consider this type of financing.

In different situations, such as a construction company, there is not any inventory turnover, and the business will consider the total profit from the job.

If a construction company has a contract that will pay them $200K upon completion of a job and their cost is $75K, then a cash flow loan based on bank statements may work well for a business in this case, and can be used to purchase raw materials, hire additional job site labor, and operate or purchase machinery if needed.

The decision whether the cost of funds on a cash flow loan is justified must be considered on a case by case basis for each business.

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Large lending institutions have for many years used auto decisioning.    An applicant completes an application and instead of it being manually reviewed, it is reviewed by an automated computer system.    Do these systems correctly review an applicant’s credit file?

Automated systems review many factors when assessing an applicant’s credit file.   One of the factors with regard to unsecured credit is the total amount of unsecured credit lines, and total amount of unsecured credit balances.

Trade lines listed on an individual’s credit file are generally listed either with an “R” for revolving, or “I” for Installment.

A major glitch has been seen in the past in which revolving home equity lines of credit show up as a “R” on a credit file, but they are not unsecured, they are secured with the homeowner’s home.   Since Real Estate revolving equity lines have very high limits, if, due to their being listed as an “R”, they are added in the summary section of the bureau under “total unsecured balances” and “total unsecured limits”, this will greatly increase the total dollar amount that the applicant will appear to have under unsecured balances and unsecured limits.

As an example, if an applicant has $20K in unsecured account balances, and also has a $200K revolving home equity line of credit, with a $100K balance, the applicant will now, in the credit bureau’s summary section, be listed as having $120K in unsecured balances.

Since most lenders have a maximum limit of the total amount of unsecured balances an applicant can have, a great many customers may very well have been auto-declined for “excessive unsecured balances”, when in fact, their true credit card balances and unsecured account balances this figure is supposed to represent, are much lower, and very arguably,  inaccurately portrayed by the credit bureaus.

Since many applicants have revolving home equity lines of credit with balances, many applicants may be inaccurately detrimentally judged by automated systems.    Applicants with this characteristic should closely review such decline reasons given by a lender.

If they have received this type of decline reason, they should call the lending institution and make every effort to speak with a supervisor at the outset.  It is very doubtful a regular customer service representative they get will understand, have the authority to, or be willing to review this issue.

Upon speaking with a Supervisor, ask for a re-review.    Ask if the Supervisor has the authority to re-review the application.   If so, ask for a formal re-consideration.

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When traditional funding sources such as banks decline an applicant, very often some of the decline reasons seem insignificant, or even illogical.

A very common occurrence is for the top 4 decline reasons to be provided.   Often, the first 1 or 2 reasons, sometimes even 3 out of 4 reasons seem either appropriate, or at least acceptable decline reasons.     A typical first reason may be “delinquent credit history”, or “collection accounts”.     However, the third or fourth reasons are often “too many accounts with balances” or “too many unsecured accounts” or “too many recently established accounts” or very similar language.

They are saying you use too many accounts, you have too many accounts, or you opened too many accounts too recently, in their opinion.     In many of these cases, the credit scores of such files with the more ambiguous declines reason are in the high 700’s or higher.

For credit files in the high 700’s that get declined, there often are no obvious decline reasons,  so what can be considered weak or controversial decline reasons are the only reasons provided.   In such cases, there may still be three or four decline reasons.

The credit bureaus provide the lenders reviewing credit the top reasons why a score is lower than the highest score possible.   The banks then decide how many of those reasons, and which of those reasons to provide for those applicants they want to decline.

Someone with a 775 credit score may receive a decline from a bank due to the bank’s view that their accounts have not been established long enough.   For someone such as this, the 3rd or 4th decline reason may be even more ambiguous, “accounts too new to rate”, or “too many new accounts to rate”.

The lenders may also strategically be protecting themselves in the event a declined applicant disputes a decline reason.   If the bank declines for only 1 reason, the applicant may resolve this reason, come back to the bank, provide evidence the issue has been resolved and in essence, “demand” the loan.   An applicant may also dispute the validity of a decline reason, and therefore also”demand” the loan on the grounds that the decline reason was in error.

To avoid such situations, lenders often issue several decline reasons in order to put themselves in stronger position.   If an applicant resolves or disputes one decline reason, the lender can now simply re-review the file and decide if they want to approve the loan and are not under pressure to now approve the applicant.
The lender can now simply stand on the remaining decline reasons and basically decline the applicant a second time.    For the reasons listed, many lenders decline for several reasons and will continue to do so.

Heard this scenario before?:

You go to the bank, inquire about a loan, and leave feeling like the bank will make you a loan even before you apply, only to take a hard landing and be declined at the end of the process?

Apply where you have the strongest chance of being approved.  Start Below.

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Why does this happen?   Banks do not want to discourage an applicant, even if the customer gives them info upfront that they know will be a decline.

Experienced bankers may tell you upfront that certain loans cannot be done.  Even experienced bankers will usually only do so with obvious decline reasons.

This happens where loan requests are made for loans the bank never does.   Examples are loans against overseas houses, or against vehicles that are too old, for example.

The driving force behind this fear is accusations of misrepresentation, discrimination and eventual litigation.

Banks would rather just have you apply than tell you in advance that the chances are very low they will do the loan, to the point they are willing to take a hit on the processing costs associated with your application.

When going to a traditional bank for a loan, speak with an experienced loan officer and present as many facts surrounding your situation as you can.

Listen closely to their answers, maybe they will tip you off in advance of the likely outcome.  This will save you weeks of time and hours in applications and phone calls and leaving you with nothing to show for it.

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