Why the bank says no.

The No. 1 reason why lenders reject a company’s loan application? Poor cash flow or weak earnings.

That’s according to a 2015 report by the Pepperdine Private Capital Markets Project. Researchers surveyed dozens of bankers and asset-based lenders—the majority of them from community-based institutions—and 36 percent of them identified cash flow and earnings as the chief problem with most loan requests.

The other major “red flags” were a lack of sufficient collateral (25 percent) and the company’s debt load (15 percent).

The smaller the business, the harder it is to secure a bank loan.

In the third quarter of 2015, the loan approval rate was about 30 percent for companies with less than $5 million in revenue, according to the Dun & Bradstreet and Pepperdine Private Capital Access (PCA) Index.

That’s down from 46.1 percent a year earlier.

For companies with less than $500,000 in revenue, about 20 percent could secure a bank loan. The success rate was 16 percent when approaching an asset-based lender.

THE SILVER LINING

Even as the surveyed lenders reported a decline in the credit quality of loan applicants (a net decline of 11 percent), they also predicted a better lending environment and increases in their institution’s lending capacity and appetite for risk.

Access to private capital was up 2.8 percent compared to the second quarter, and demand grew by 0.7 percent. The majority of those seeking loans (62 percent) need the money because they see growth ahead.
The other good news for smaller businesses? Lenders said most of their loans (83 percent) were going to companies with EBITDA under $5 million.