Equity is in the green, cash flow is positive, the company is profitable. Adequate guarantees are also available. The credit check, you think, is a formality. But then comes the hammer: “We regret to inform you that the bank is rejecting your financing application.”
Upon request from your corporate client advisor, you will learn that “business reasons” were the decisive factor. Business reasons? What is behind this opaque notion of everyday life?
Banks regulate their lending policies in their credit policies and guidelines. It shows who is responsible for the lending process, which criteria have to be checked and when a loan is to be rejected in principle. Basically, the larger the requested amount, the higher the level at which the loan decision is made. Both quantitative and qualitative factors are checked. The quantitative factors are based on the company’s key figures and the credit history. They are of the greatest importance in the credit check. However, the qualitative factors should not be underestimated, as they allow considerable discretion.
No loans to high-risk industries
There are also tough exclusion criteria that differ depending on the bank and branch. For example, some banks refuse to finance certain investment properties or types of projects. For example, they do not grant property developer loans or finance merger and takeover projects. Many financial institutions also generally exclude certain industries from lending. Above all, the following are affected:
- Arms manufacturers and dealers
- Gambling operators
- the red light environment
- Industries in which environmental or human rights standards are frequently violated
Other sectors of the economy that banks regard as particularly risky are also excluded from lending. The industry-specific exclusion criteria may change depending on the bank’s assessment and the current economic situation. Some of them only apply to certain regions. There are regional restrictions in particular at the savings banks and some cooperative banks. Due to the regional principle, they are not allowed to lend to companies outside their sphere of activity. For many banks, lending to foreign investors or foreign-controlled companies is a no-go.
Risk limitation through limits
In addition to absolute exclusion criteria, financial institutions check compliance with certain limits. They link their acceptance or rejection to the amount of the financing, the loan term and the own funds used by the customer, whereby they differentiate according to the type of project or investment object. They are typically more generous with existing customers than with new customers. Sometimes the opposite is the case. The banks take into account the entire credit exposure to a customer when checking their credit. If this is already large, the overall risk with an additional loan might exceed the tolerance threshold.
The criteria mentioned are more or less understandable for the customer. They can be found in the credit principles and guidelines. However, as I said, the lending process also includes considerable discretion. Not all banks or branches have specialists who are able to understand innovative projects or business models. The risk assessment is correspondingly different. There are also major differences in the valuation of property, plant and equipment, provisions, extraordinary income or off-balance sheet financing. The valuation differences for intangible assets such as brands, patents or licenses are particularly large.
Request multiple banks
What does this mean for medium-sized companies that need a loan? Putting your head in the sand and accepting the decision-making power of the house bank? On the contrary! Finally, the different business policies of the banks also have their advantage. If one institution refuses to fund a project or investment, there is most likely another that willingly approves the loan. It is therefore worthwhile to ask for more than one bank for financing right from the start. This increases the likelihood of receiving a promise. With several offers, this procedure also enables a comparison of the conditions.
Favorable credit conditions thanks to Clearfund Finance
Moneyrate Finance makes loan comparison easy. All you need to do is upload the relevant documents (business evaluations, annual financial statements, total and balance lists) via our online portal. Our specialists will take care of the rest. You send your request to a network of over 230 financing partners and then submit the best offers. In addition to corporate loans, we also provide alternative financing solutions such as subsidies, factoring, leasing, goods or warehouse financing.