Explaining Negative Circumstances to the Lender

Many borrowers have faced special circumstances that weakened their position for getting a business loan or diminished the lender's enthusiasm for considering the request. Such circumstances can vary greatly, ranging from youthful indiscretions to medical tragedies. Often the situations have nothing to do with the borrowers's past business performance, moral commitment to repay debts, or prospects for succeeding in the future, and many lenders realize this. It's therefore important for the borrower to be thoroughly honest with the lender in disclosing these occurrences.

The suggestions provided here are for the purpose of assisting borrowers to overcome those negative situations under which their personal credit record may have been tarnished due to events beyond their control. They are not intended for use to help build excuses against willful deceit, fraud, or irresponsible behavior. By following these common-sense tips in explaining the particular circumstance, borrowers can give lenders the additional information that they may need to make insightful and fair credit decisions.


Unfortunately, bankruptcy is a fact of modern life. Since the laws governing it were liberalized in the 1980s, the number of businesses and individuals seeking financial protection has increased dramatically. In actuality, from a purely business standpoint, bankruptcy is often a legitimate strategy. It's a method of handling overwhelming liabilities or otherwise dire situations. Although certainly abused by some, bankruptcy can, at times, be the debtor's most rational decision. However, it must be stated that it is not always a good strategy, and it can be extremely costly. Many business owners receive poor advice and run to bankruptcy prematurely, without sufficient regard for the consequences that it brings. And once the decision is made, those consequences will remain with the debtor for many years.

If the borrower has been involved in a bankruptcy case (whether personal or business), the lender will discover this fact early in the application process. So it's better for the borrower to disclose the facts before the lender reads the scant information contained in a credit report. Additionally, because bankruptcy proceedings are a matter of public record, the lender will also be able to obtain a copy of the borrower's case file in order to verify the dates, creditors, debts, and final results of the case. In other words, any fictionalized accounts of the case on the part of the borrower could permanently destroy any credibility with the lender. However, before referring to the bankruptcy, the borrower should ensure that the lender is indeed interested in the transaction. If the loan officer (or, LO) isn't comfortable with the merits of the deal before learning about the bankruptcy, there's virtually no chance that the borrower will be approved once the information comes to light.

In addition to verbally disclosing the particulars of the bankruptcy to the loan officer, the borrower should also provide a written version for subsequent review. Because the LO will almost certainly have to relay the information in writing, it better serves the borrower to supply a detailed transcription as the basis for the report.

The borrower should document the circumstances thoroughly and substantiate any difficulties that led to the decision to seek bankruptcy protection. If the borrower was not at fault, proof should be offered in the form of affidavits from other parties, accident reports, medical records, pictures, newspaper articles, or any other information available to support his or her position. Furthermore, if the bankruptcy has been discharged, the borrower should provide a detailed summary – with supporting documents – of how the case was resolved and what the borrower has done since the case was dismissed.

If the bankruptcy was due to unwise or irresponsible management rather than unfortunate circumstances, the truth is nonetheless equally important. Depending upon the amount of time that's passed, the amount of money lost by creditors, and how the borrower has fared since the action, the lender may still consider the loan proposal.


Not coincidentally, because more than three-quarters of the world's lawyers are in the United States, American citizens generally carry higher odds than others of being sued over a dispute. This exposure is increased even more dramatically for small business owners. As such, people can spend considerable amounts of money and suffer severe financial damage even when the only situation that comes to fruition is an accusation.

When a business owner's financial statement is blemished by the significant expense of defending a lawsuit, or when he or she has settled a suit to limit such costs, the loan officer is necessarily entitled to a detailed explanation of the occurrence. By putting the issue into context and perspective, the borrower can help the LO to understand the impact of the litigation on the company's finances. It also allows the borrower to move the application process beyond the legal issues so that the positive aspects of the loan proposal itself can be emphasized and evaluated.

Most lenders won't proceed with a loan request if there's a material lawsuit pending at the time of application. Routine matters that occur in the normal course of business and do not threaten the borrower's financial condition, however, will generally not have an impact on the application process. But if any matter of true substance against the company remains unresolved or is in appeal, the lender will probably wait until final judgment has been rendered before moving forward with the proposal.


Divorce has led to disaster for many small business owners. Because the process can be extremely strenuous for the individuals involved, underperformance with regard to business responsibilities has often been the result. Furthermore, financial settlements have also been known to be highly disruptive if a borrower is forced to buy out or share the business ownership interests with an ex-spouse.

If the business owner has recently completed the divorce process, it's important to provide the lender with an explanation concerning any impact that the divorce may have had on the business or the owner's personal financial condition. Again, supporting documents should accompany the brief, such as copies of bank records, financial statements, and a copy of the final divorce decree. However, personal (in other words, emotional rather than financial) aspects of the divorce should be avoided, as they are not only irrelevant but could also be potentially detrimental to the loan application.

If the divorce is not yet finalized, the borrower would be wise to consider waiting until the process is completed before making a business loan application. When resolving the complicated and emotional issues of divorce, the anxiety of seeking credit can only be compounded. Most borrowers would generally be better served by focusing on one major situation at a time.

Bad Decisions

The old adage, "to err is human," is certainly true; however, some mistakes are more costly than others. Small business owners often perform the duties of a chief executive officer, chief financial officer, chief operating officer, advertising agent, transportation specialist, tax expert, computer technician, and any else that may need doing. In an ever-changing economy, operational as well as strategic decisions must be made on a regular and continuing basis. Because small business owners are constantly making decisions with long-term implications, inevitably errors are sometimes made.

When the LO is briefed about such errors, the borrower's candor is naturally factored into the assessment of the actions that were taken by the business owner to overcome the mistake. If the borrower qualifies under the other criteria necessary to obtain financing, previous errors of judgment generally should not prevent the loan from being approved.

Bad Health

More than a few business owners have fallen victim to extended illness or injury due to an accident, with only one of the many consequences being serious financial damage. It would seem to be quite unfair to relegate such individuals to never again being able to qualify for business credit, especially if the borrower had a spotless track record before the occurrence. Lenders are human beings as well, and many of them share this sentiment.

Once more, the borrower should provide documentation to communicate and confirm the medical situation to the lender, explaining the effect that it had on the business operation as well as on the borrower personally. Although the borrower can and should expect compassion for such situations, the realization must remain that he or she still shoulders the burden of proof. Rather than giving the LO all the particulars of the treatment and procedures, a generic description of the medical condition will provide sufficient personal information, after which the borrower should emphasize economic health and focus on the financial details.

Bad Credit

It's very important for the borrower to manage his or her personal credit wisely in order to keep a clean payment history and avoid negative entries on a credit report. Lenders focus on a number of aspects in the credit file, including the total amount of credit outstanding, the payment history, and any public records that could indicate unsatisfactory or irresponsible conduct of the borrower's personal affairs.

If the borrower has bad credit, the lender should be told why. There are times when bad credit is not the result of poor management or a lack of responsibility, but rather circumstances that affect the borrower's ability to meet those responsibilities on a consistent basis. To earn the lender's confidence, the borrower must demonstrate that those circumstances have been surpassed or improved to a degree that will not interfere with his or her ability to make payments on the loan being requested

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