"Why can't I get a loan?" - Making Sense of Elusive Bank Loans
Updated: Jan 25
Where have the loans for our small businesses gone?
I recently sat down with Tim Russell, the founder of Maggie’s Farm, an award-winning rum distillery located in Pittsburgh’s trendy Strip District. We met at his distillery, a hip, raw post-industrial space that houses both rum production and a bar where patrons can imbibe hand-crafted cocktails that showcase their rum and an impressive local beer list.
Tim, a craft beer veteran, started Maggie’s Rum four years ago and since then the team has grown the business by about 50% each year, pumping nearly all profits back into the business to continue to grow and expand.
Tim inspecting a still at Maggie’s Farm.
If you’re anything like me, you might be thinking that banks would be knocking down the door to get Maggie’s Farm as a customer.
Well, unfortunately that just hasn’t been the case. In fact, in four separate attempts over the past four years, Maggie’s Farm has been denied for a loan. To make matters worse, each time they applied, Tim and his team were strung along for weeks of meetings and paperwork before ultimately being denied - wasting his precious time and slowing his company’s growth.
So, how is it that a profitable company, with oodles of precious inventory, a killer business plan, and a highly creditworthy founder couldn’t get access to a bank loan? Here are a few thoughts:
Unfamiliar Industry - One of the reasons that Maggie’s Farm has been so successful is that they were the first rum distillery in the Commonwealth of Pennsylvania. While consumers seem to be thrilled with this, banks were scared. You can just imagine a room full of bankers in an underwriting committee saying “We’ve never lent money to a rum distillery before, this seems too risky.” All while the customers keep buying and loving the product.
Limited Personal Collateral - Business owners pour their heart and soul into their businesses and often that means contributing their personal wealth, too. Tim has worked hard to maintain a nearly perfect personal credit score, but since most of his personal wealth went into Maggie’s Farm, he doesn’t have many other personal assets for the bank to claim as collateral. Tim’s financial commitment to Maggie’s Farm should be celebrated, but instead banks say he lacks personal assets to collateralize.
Relatively Small Loan Size - Most of Tim’s loan requests were fairly modest, each less than $100,000. You might think that this is a positive for Maggie’s Farm since banks are so risk-averse. However, banks make more profits on larger loans than on smaller loans so there is an increasing trend across the country that banks are unwilling to do small business loans under $100,000 and in some cases, under $250,000.
Limited Operating History - Banks love to see businesses with a long operating history. The irony is that by ignoring businesses with shorter operating histories, banks are preventing more businesses from becoming successful and ultimately achieving a long, healthy operating history. After celebrating its 4-year anniversary, this is less of an issue for Maggie’s Farm, but it still prevents millions of successful small businesses from getting the expansion loans they need to grow.
Unappreciated Asset - Rum distillation is naturally an asset-intensive process. Maggie’s Farm has several large, beautiful stills, rum aging in barrels, and various other equipment in the facility. But banks have failed to capture the single largest asset - the business’s loyal customers. Don’t take my word for it, just check out their Yelp reviews or their Facebook following, people love this place and keep coming back for more!
Businesses like Maggie’s Farm make our communities more vibrant, fun, and livable. It’s disheartening that banks are neglecting them.
Has your business struggled to get a bank loan? If so, we’d love to hear your story. Please comment below or email me personally at firstname.lastname@example.org.
George Cook is the Co-Founder and CEO of Honeycomb. As a sixth-generation community banker, George is passionate about the positive impact that local lending can have on communities. When he’s not trying to fix the U.S. financial services system, George can be found exploring the wonderful neighborhoods and small businesses of Pittsburgh with his wife, Elizabeth.