By Jodh Mehmi, Mehmi Financial Group
No law requires a bank to approve a small business loan. Banks decide based on their own credit standards. What U.S. law does regulate is how lenders treat applicants and what they must report.
Regulation B and fair lending
The Equal Credit Opportunity Act, implemented by Regulation B, applies to business credit as well as consumer credit. The CFPB has amended Regulation B for small business lending, as described on its small business lending rule page. In plain terms, lenders cannot discriminate against applicants on prohibited bases, even when they decline a loan.
The 1071 small business lending rule
Section 1071 of the Dodd-Frank Act amended ECOA to require financial institutions to collect and report data on credit applications from small businesses, including women-owned and minority-owned businesses, according to the CFPB rulemaking page. This is a reporting rule; it does not require any lender to approve an application.
Does Regulation Z (Truth in Lending) apply to business loans?
Generally no. Regulation Z exempts credit extended primarily for a business, commercial or agricultural purpose, under 12 CFR 1026.3(a). That means many consumer disclosure rules do not apply to business loans, so read business loan agreements carefully. Some states have their own commercial financing disclosure laws.
Why banks decline small business loans
- Limited time in business or thin financial statements.
- Low or uneven cash flow.
- Not enough collateral.
- Credit history concerns.
- The request falls outside the bank's appetite or industry focus.
See why banks reject business loans.
If a bank says no
Ask for the reasons, fix what you can, and compare other lenders. Equipment finance companies, alternative lenders and government-backed programs each use different criteria.
What happens after a decline
Lenders generally must notify an applicant of the action taken on a credit application. Ask the lender which factors drove the decision. The answer tells you what to fix, such as cash flow, collateral, credit or time in business, before you apply again.
How to strengthen a small business application
- Prepare up-to-date financial statements and recent bank statements.
- Explain any unusual months or one-time losses.
- Offer collateral where you can, such as the equipment being financed.
- Reduce or explain existing debt.
- Match the request to its purpose, for example an equipment loan for equipment.
Alternatives to a bank loan
- SBA-backed loans: made by approved lenders with a partial SBA guarantee.
- Equipment financing: secured by the equipment, often with different criteria than bank loans.
- Credit unions and community lenders: may consider local relationships.
- Invoice factoring: based on your customers' payment strength.
State commercial financing disclosure laws
Because federal Truth in Lending rules generally do not cover business credit, several states have passed their own commercial financing disclosure laws for certain business financing. Check the rules in your state before signing.
How Mehmi Financial Group can help
Mehmi Financial Group is a financing brokerage. We compare options from banks, equipment finance companies and alternative lenders for businesses in Canada, the USA, the UK and Australia (equipment financing is available in Canada and the USA). Each lender sets its own approval, rate and terms. You can compare business financing options or equipment financing options.
Frequently asked questions
Are banks required to give small business loans?
No. Banks decide based on their own credit standards. Laws regulate how they treat applicants, not whether they must approve.
Does Regulation B apply to business loans?
Yes. ECOA and Regulation B apply to business credit, and the CFPB has amended Regulation B for small business lending.
Are business loans covered by Reg Z?
Generally no. Reg Z exempts credit primarily for business, commercial or agricultural purposes under 12 CFR 1026.3(a).
What is the 1071 rule?
A rule requiring financial institutions to collect and report data on small business credit applications. It does not require approvals.
Can a bank decline me without a reason?
Lenders generally must give notice of action taken on an application; ask the lender for the reasons.
Do these rules apply in Canada?
No. These are U.S. rules. Canadian lending is governed by Canadian federal and provincial law.