73. My Bank won’t give me a Loan. What Should I do?

My bank won’t give me a loan to expand my production. What should I do?

The obvious – but wrong – answer is to look immediately for another bank that will lend. The danger is that your bank has made the correct decision on the information you gave it, and by simply reapplying elsewhere you are condemning yourself to another refusal – and a waste of your valuable time.

The correct answer is to ask your bank why it refused your request and then to act accordingly. Broadly, there can be three answers:

  1. The request was badly written in that it did not clearly state the requirements, describe your situation, present the economics, or identify and address issues.
  2. The request was well written, but the underlying economics or risks were unsatisfactory.
  3. The request was well written and economically sound, but the bank has a limited appetite to lend in the relevant area.

Now you have the starting point for sensible action.

  1. If the feedback is that your request was badly written, then you should get as much clarification as you can and consider how you might rewrite the application to make it clear. No one is going to lend you money if they can’t understand what you need it for and how you are going to repay it. Test the document with friends and family – not for their lending decision but for whether they think your writing makes sense. Rewrite your application so that it tells your story clearly and anticipates questions. Then you have a starting point for re-opening the conversation with your bank – or, if that doesn’t work, jumping to point 3 below.
  2. If the bank is telling you that your request doesn’t make economic sense, remember, there is always a possibility that they are correct. So again, try to get as much feedback as possible and, without arguing back, make sure you understand their point of view. If you are not convinced, find someone you trust and discuss the request with them, making sure that you give an objective report of the bank’s opinion.  If you still think the request should fly, then again jump to point 3. If not, then you have to go back to the drawing board to get a better idea. Every situation will be different, but some areas to look at are:
    • Reduce fixed costs – even if this increases variable costs (e.g. outsource some production rather than hire new staff). This reduces risk at the expense of reducing return.
    • Look at locking-in customers – for example by offering a lower price for fixed larger volume – again lowers net profit but also lowers risk.
    • Change the speed of roll-out or the mix of products etc. – this will depend on your individual circumstances but there may be a subset of your plan which is attractive even if the overall plan is not.
    • Find some asset to put up as security – this reduces risk from the bank’s perspective but increases yours
  3. If the bank says “great idea – but not for us” or if you have confidence that you are right and they are wrong in turning you down – and you are prepared to put your valuable time into it – then it becomes worthwhile enquiring with other banks. Be prepared to persevere – banks are herd animals at heart and don’t like being out on their own where the lions might eat them. Nevertheless, if the idea is good you have a reasonable chance of finding success.

If all fails with bank lending, there are other sources of finance – both bank and non-bank. But that is another story.

This is the sort of area where having someone who knows the ropes and expectations of funders can really save you time and effort. Contact Tectona if you need that unfair advantage.

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