Friday, May 28, 2010

Why Banks Turn Down Loans

As companies gear up to take advantage of the recovery (see my column in Monday’s Financial Post for more on that), many will be looking to their banks for additional financing.

Want to know why banks turn down loan applications? Legendary Canadian entrepreneur Frank O’Dea, founder of The Second Cup, wrote about this recently on his website. While the article was apparently written for members of CAFE (Canadian Association of Family Enterprise), you should read it, too.

According to O’Dea’s discussions with bankers across Canada, here are the five main reasons that banks deny commercial financings:

1. The clients were unprepared.
2. The clients were knocking on the wrong door (e.g., seeking financing that should be sourced from venture capital firms)
3. Too much reliance on SBLs (government-funded loan guarantees)
4. No Back-up plan. Are you ready for a rainy day?
5. The project's business cases are weak.

O’Dea goes on to cite one more reason, which he says was never voiced, but clearly implied. Sometimes individual bankers just don’t like a deal. He says one banker equated it to publishing: several publishers may reject a manuscript before one accepts it and makes it a bestseller.

Now read the full story:

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