Most business owners approach a bank first when they need capital. Many leave without financing — and without a clear explanation of why.
Understanding how banks evaluate commercial loan requests, where they consistently decline, and what alternatives exist prevents two common mistakes: wasting months on a process that was never going to work, and defaulting to expensive alternative capital when better options were available.
How Banks Evaluate Commercial Loan Requests
Banks underwrite against five criteria — the Five Cs:
Credit — Personal and business credit scores are screening filters. Most conventional bank lenders require personal scores of 700+ for unsecured credit, 680+ for secured lending.
Capacity — The business must generate sufficient cash flow to service existing debt plus the proposed obligation. Banks calculate DSCR — net operating income divided by total annual debt payments. Most require 1.25 or higher.
Capital — How much of your own money is in the deal. Equity injection requirements of 20–30% of total project cost are standard for acquisitions and significant expansions.
Collateral — Banks want loans secured by identifiable assets. Unsecured business loans are rare and limited to borrowers with exceptional credit profiles.
Character — Background review including prior bankruptcies, criminal history, and business references.
Where Banks Consistently Decline
Time in business under two years — Banks rely on operating history. Most require a minimum of two years with documented tax returns.
Revenue below threshold — Most conventional bank lenders require $250,000+ in annual revenue for term loans.
Industry concentration risk — Restaurants, construction, and certain retail categories frequently hit internal concentration limits.
Declining revenue — Banks underwrite trends, not snapshots. Two years of declining revenue raises repayment risk concerns even from a profitable baseline.
Complex ownership structures — Multi-entity structures and multiple principals create documentation complexity.
The SBA Bridge
SBA loan programs exist to address the gap between conventional bank credit standards and viable businesses that do not quite meet them. The SBA guarantee reduces lender exposure — enabling lower credit score thresholds, lower equity injection requirements, and longer repayment terms than conventional bank financing.
For businesses close to bankable but not quite there, the SBA path is almost always worth exploring before moving to alternative capital.
Alternative Financing: What It Is and What It Costs
Alternative financing covers merchant cash advances, revenue-based financing, online term loans, invoice factoring, and others.
Where it makes sense:
- Revenue is present but too recent for bank documentation requirements
- Speed of capital is genuinely critical
- Collateral is unavailable for conventional financing
What it costs:
- Merchant cash advances: effective APRs often 40–150%
- Online term loans from non-bank lenders: typically 15–40% annualized
- Invoice factoring: discount rates that compound quickly at scale
Alternative financing is appropriate when it solves a specific problem that conventional financing cannot. It is expensive when used as a default.
The Decision Framework
- Assess your profile honestly — Credit, time in business, revenue, collateral, equity available.
- Start with the lowest-cost option you qualify for — Bank conventional, SBA, CDFI, or credit union before alternative products.
- Understand why you were declined — A decline from one lender is not a verdict on all lending.
- Use alternative financing intentionally — Model the total repayment obligation, not just the factor rate.
How SGF Approaches This
SGF works with businesses across the credit spectrum. The first step is always an honest evaluation: what programs are available, what the realistic terms look like, and what would need to change to access better options.
Explore financing programs or contact SGF to discuss your situation.
Starting Gate Financial is a commercial financing firm based in Richardson, TX. We do not quote rates or guarantee approvals. All financing decisions are subject to lender underwriting criteria.