Six Reasons that Loans Get Declined

Declining loans is the worst part of my job. I sometimes come across funeral directors who take new jobs, move their families, or even sign agreements to purchase a funeral business assuming that they will be able to get financing for a transaction. When you are that far along, a decline can feel like a crushing blow. What frustrates me most is the many times this could be avoided. It’s absolutely critical to ensure you have options for funding lined up at the start.

Often a decline is not due to one single factor. When a borrower has multiple marks against them or they are found to be less than forthcoming with information, loan committees get uncomfortable and are less likely to approve a transaction. I find it helpful to talk through any issues that you might be concerned about upfront. If you are not a fit at one bank, they might be able to tell you that quickly, so you can explore other options, rather than get a month into the process and be required to start over. Sellers can quickly become frustrated with a buyer that appears unfinanceable.

Before you begin the process, it can be helpful to understand why loans are declined and make sure these items will not affect you. If selling is part of your succession plan, make sure whomever you are selling to is also prepared!

1. Poor credit score:

Frequently, we come across small, unpaid medical debts for example, often less than $500, that get turned over to collections. Borrowers are often not even aware of these debts, and they can dramatically affect your credit score. Once you have carefully reviewed your report and are certain there are not any errors, you might consider freezing your credit with each of the reporting agencies. By going to each of the reporting agency’s websites (TransUnion, Equifax & Experian). You can “freeze” your credit, which means that creditors cannot access your account. It can reduce the likelihood that someone will fraudulently open accounts in your name. 

2. Misdemeanor or felony convictions:

If you have had a misdemeanor or felony conviction, no matter how long ago, let your banker know right from the start. You do not want to get weeks into the process and have the issue “discovered” by the bank. Certain types of traffic violations are automatically filed as misdemeanors in some states. As I said earlier “things happen.” Banks will want to know what happened and what you did about it. A bank will often want to see the complete court records of any offense. 

3. Bankruptcy:

If you have had a bankruptcy, it’s always best to get it on the table from the start. Even if it’s been more than seven years ago. Loan committees understand that people go through awful divorces and horrible medical issues. They will want to see evidence that it was a one-time event, rather than a pattern. Be aware, it can be a reason for a loan decline. If you ever are in a position where you feel you have to file for bankruptcy, make sure that you understand bankruptcy options and discuss the ramifications with an attorney. 

4. A history of late payments:

If you are applying for a loan, a bank will run your credit and look to make sure that you do not have a history of late payments. Credit reports typically indicate if a payment has been 30 days late, 60 days late or more than 90 days late. They prefer to see no late payments. If you are thinking about getting a loan for a business or even a home or car, make sure that all your bills are paid on time, every month. House payments, car loans, and credit card payments all need to be on time. If you have a history of late payments: start now and clean up your record. This will increase your credit score as well. If you have teenagers in your family, make sure they understand this. Too often young people think a few late payments won’t hurt them, as long as they eventually pay their bills. This is not the case. Late payments are a huge factor in your credit score and can strongly impact the interest rate you pay for a car or a house, AND a business acquisition. 

5. Cash reserves:

Banks will want to see that you have built up your cash on hand. If you anticipate getting a loan in the future, start putting money aside now. Keep your expenses low and try to save up as much as you can for a down payment. You will want to keep your discretionary spending low. Spending on elaborate vacations, boats, and shopping sprees, for example, that cut into savings is not a great idea while you are going through a loan approval. Often, if you have a larger down payment, you will be able to negotiate more favorable terms of a sale. If you have a specific purchase price in mind, please contact us and we can tell you approximately what your down payment will be, to help you work towards that goal. 

6. Inadequate management experience:

I’m sure most funeral directors have heard the saying: “A good funeral director does not always make a good funeral home owner.” It’s not enough to be a good director. As an owner, you must manage employees, understand financials, comply with state and local regulations, plan for the future, keep an eye on the competitors and all the other details it takes to run a business. Before you take the leap from director to owner, you want to get some experience. Having an experienced mentor will help. It is not enough to prove that you can do it, YOU need to be sure that you want to do it. Ownership has a lot of rewards, but it also has a myriad of responsibilities above and beyond being a funeral director. To make a leap without having adequate experience is often too risky for both a funeral director and a lender.

Whether it is to finance a business acquisition, expand, remodel or even refinance, having a relationship with a bank is important. They can help you move quickly and present multiple options to you. Banks want to give loans and want to help build communities and small businesses. They are mandated by their shareholders and often by the U.S. Small Business Administration to be good stewards of the funds that they loan. A good bank will want to protect their investment by loaning only to credit worthy individuals and businesses. On the flip side, the bank wants you to be a good steward of your business. They want to know you understand how the business generates revenue and produces cash flow. At the end of the day, a bank cannot investigate and understand every facet of the business. It is up to you to make sure that the acquisition or expansion makes sense.

Positioning yourself for approval helps avoid being turned down, unwanted surprises, and delays in a transaction and, ultimately, disappointment and frustration. It is never too early to prepare. Making sure your personal financial records are correct and in order are the first step in a loan approval process. Check your credit and pull together a personal financial statement listing your assets and your liabilities. These will help to get you down the path of a loan approval and avoid being blindsided by a loan decline. Even if we are not a fit, we are always happy to help or point you in the right direction!

Jody Myers is the Vice President at Funeral Home Financing Associates. At FHFA, we have been providing financing options for acquisitions, sales, refinances, and construction projects in the funeral industry for over 20 years. Please contact Jody at jmyers@funeral-financing. com or at 309-258-3708 for additional information or to discuss lending options!

Funeral Home Financing Associates

Our mission has always been to help funeral home owners and first time buyers build their dreams by providing financing. We work only with funeral professionals and understand that the value of a business is more than just the hard assets and real estate. Many of our clients choose us because we can provide up to 100% financing. Often, directors that we work with appreciate the ability to borrow outside their local community, thereby keeping your transaction confidential.

Choose us for 3 reasons:

EXPERTISE – We only work with the funeral industry and understand the value of a business is more than just hard assets and real estate.
PROFITABLE – Many of the directors we work with choose us because we provide up to 100% financing for their acquisition. CONFIDENTIAL – Many clients appreciate the ability to borrow money outside their local community, thereby keeping their transaction confidential