Small business owners don’t always realize that there are alternative financing options when banks say no. In this blog, we’ll discuss seven common reasons that a bank might reject a small business’s loan application and how, in some situations, a private capital loan might be a short-term solution to help a small business get out of a tight spot now and, potentially, into a better position to get bank financing later on.

1. Heightened regulation standards. In the wake of the recession, increased federal regulations have resulted in banks being more conservative about the amount of risk in their investment portfolio. Small businesses inherently represent more risk than large corporations, making banks hesitant to lend to them.
2. Underprepared applicants. Sometimes small business owners don’t understand the process of applying for a small business loan and think that they can just walk into a bank, fill out an application, and get approved on the spot. Whether requesting a conventional small business loan or a private capital loan, it’s important for small business owners to come prepared with a business plan, financial statements or projections, bank statements, tax returns, credit reports (business and personal), and copies of any relevant legal documents (such as articles of incorporation, leases, contracts, operating licenses or permits).
3. Collateral requirements. Banks will often require a small business to put up property as collateral for the loan even if the loan is not for a real estate purchase. This requirement can put pressure on a small business owner without valuable business collateral to use personal property such as a car or house as collateral for their small business loan. If you are a small business owner, a private capital loan can be a helpful short-term solution by making it easier to purchase your first property, or by offering you a cash-out loan with fewer financial constraints than a conventional small business loan if you already own a property outright.
4. Credit problems. Having little or no credit history as a start-up company can be one of the biggest lending hurdles for a small business owner. This is another situation in which private capital loans can be helpful as private lenders are less interested in credit history and more interested in the value of the real estate that would secure the loan.
5. Decreased community banking. Historically, community banks are three times more likely to approve a small business loan than a major, national bank. However, the number of community banks has been dropping since the 1980s, and community banks were a major casualty of the housing crisis and recession, greatly reducing funding opportunities for small businesses. The reverse is true of private capital lenders who are becoming a more permanent presence in the real estate financing industry, especially in recent years as bank financing has dried up.
6. Cash flow problems. Increased federal regulations have made bank lenders even more concerned about debt service coverage ratio, or the cash flow available to pay current debts, including payroll, inventory, rent, and other expenses in addition to the new loan payment. Private lenders, on the other hand, have more freedom to structure a loan to meet the small business owner’s needs.
7. Smaller loan amounts. Because it costs the banks the same amount to underwrite a $1 million loan as one for $200,000, the bank prefers to spend money where it can see the most profit, which is on the larger, corporate loan. However, most private capital lenders are small business owners themselves and as such they are much more willing to consider funding loans as low as $300,000.

If you have a small business real estate-related purchase in need of financing, contact Montegra at 303-377-4181 to discuss your loan request and find out more about how our private capital lending programs can help your small business.