NFIB

Little Red Flags Could Lead to Loan Rejection
04/ 08/ 2003

by Jeffrey Moses

Lenders try to be as objective and complete as possible when reviewing loan applications. Banks and other sources of funding do not want to risk lending to companies that present even the slightest chance of not paying back the loan. Many red flags are obvious, such as excessive outstanding debt, declining sales or profits, buildup of unsold assets and delinquencies on loan payments. Other red flags may indicate only the slightest risk, but can be just as detrimental to an application. These include:

1. An increase in the number of credit checks on your record

This could signal that you have been searching for financing from other lenders, or that you have had to switch suppliers and are setting up new lines of credit. Lenders don't like loaning money to companies that are in financial transition.

2. Loss of one or more major customers

Many companies try to keep this information from lenders. It's usually better to inform lenders straightaway than to have them find out on their own and think that you were hiding important facts.

3. Loss of major suppliers

When a company loses sources for materials or products, its business will suffer until it locates reliable new suppliers.

4. Incomplete financial records

Lenders might find this simply inconvenient--or they may look for deeper reasons why you didn't supply complete information on your application.

5. Unusual increases or decreases in account balances

While unusually low bank balances indicate financial trouble, why would increases raise a red flag? Because anything out of the ordinary is of interest to lenders. Excessive increases could indicate that loans were received from other sources or that assets have been sold off, signaling financial difficulties.

6. Recent changes in attorneys, accountants or business advisers

This could indicate that unusual or even unethical practices are taking place. Lenders may also note recent turnover of high-level executives.

7. Difficulties with regulatory organizations

This could be taken as a sign of forthcoming legal action, financial penalties or even business shutdown.

8. Difficulties in the personal finances of one or more key employees

This could indicate company financial problems or upcoming personnel changes.

9. Maintenance problems

If a lender visits your business and finds any type of disrepair that could lead to financial loss (a leaky roof, rusty old delivery trucks, icy walkways, etc.), a deeper look into your financial situation could result.

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