One Man’s Story of a Very Unwilling Bank

A reader we’ll call H., who’s in the rental-property business, writes in with a bizarre story about his bank. Assuming it is at least 60% true from both sides (his side and the bank’s), what are we to make of this?

My partner and I were looking to obtain a small business loan. Our banker told us that loans are very hard to obtain because banks are being very stringent. Not like we were going to shut down without a loan, but we figured it could help us grow the business. So, in an effort to build credit (and a good relationship) for our business with a major U.S. bank, my partner and I proposed to our banker that we would give him $50,000 cash to hold onto and in return, have the bank loan us $50k for 5 years. Basically we were securing the loan with cash as collateral. This way, we could prove to the bank that we are a responsible business and were hoping that after this first loan, the bank will be willing to lend to us in the future with more favorable terms. Basically, if we ever defaulted on our loan, the bank would have our $50,000 in their vaults to take from.

I was shocked to hear his response. He basically said that the underwriter could only approve this type of loan for $25,000. Email below:

“Hey H.,

As I discussed on the phone here are the terms of the loan:

 5.95 interest rate
$75 origination fee
60 months payment plan (no prepayment penalty)
High risk industry (real estate investment) next loan should be more favorable terms
$25,000 approval amount.

I am sorry this is not what we wanted but unfortunately I am at the mercy of our underwriters on this one.”

So I responded with:

 “Does your underwriter know/realize that we are giving him (in this case) $25,000 as collateral? Meaning, this is the most guaranteed loan (the safest bet) that BANK_NAME will ever make in its history. BANK_NAME is essentially taking zero risk. He/she should be more than happy to approve a loan similar to this in the sum of trillions. BANK_NAME is guaranteed to see the return. … the money will be sitting in your vault.

Am I missing something here? Why would he not approve this for 50K? I’m just trying to understand the rationale behind this decision. (and I understand that you are just forwarding info from the loan department).”

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  1. Tim says:

    I can only imagine that the amount approved was calculated by software that wasn’t designed to figure 100% collaterals into the equation.

    This is a good thing. The alternative would be to have human beings in offices working out whether each investment is a good idea. And we know where that gets us.

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  2. Liz says:

    This sounds exactly like a share secured loan, so I don’t really get it. You might want to try working with a community bank or credit union instead of a major US bank, though, as you’ll likely get someone more willing to work with you.

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    • Steve O says:

      The big banks are designed to make money as easily as possible (i.e., automate everything).. If you’re dealing with an institution with so little disregard for your interests (and even their own!), it’s time to move to a different institution.

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  3. Allen says:

    I think the bank is concerned that “H” is either an idiot or a clever crook, as demonstrated in the plan to give up $50,000 for five years for nothing. If he’s an idiot, there’s probably bad publicity down the road for taking again advantage of idiots (a.k.a., the foreclosure crisis). On the flip side, I’d be concerned that “H” is up to something scammy, and given he’s in the “Real Estate Investment” business. I’m with the bank.

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    • Justin Cidertrades says:

      I agree with Allen. If H wants to give up the hard cash for a loan for the same amount that will cost him interest, would you suspect that the cash is counterfeit? Hot money in marked bills? Is H looking for a money laundry? Have the counterfeit bills been treated with a chemical that will dissolve paper before the loan comes due? There has got to be a catch to this one.

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      • Mike says:

        H probably isn’t bringing 50k in cash to deposit. Even if he was, a large bank has the means to determine whether or not the cash is counterfeit.

        Banks do secured loans all of the time, usually to new businesses who do not have credit.

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  4. Geoff says:

    Hidden due to low comment rating. Click here to see.

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    • Geoff says:

      Hidden due to low comment rating. Click here to see.

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      • Erin says:

        Your logic doesn’t quite make sense because it seems to ignore the fact that the bank still gets $50,000 that they will use to generate as much interest income with as they can. I would be happy to be in that position these days.

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      • Neil (SM) says:

        Would make sense if they weren’t in the business of loaning money to begin with.

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      • Steve Nations says:

        Maybe I haven’t been paying attention lately, but as of this typing the responses to @Geoffrey Bard’s post are running at zero approve and 22 disapprove, yet the score says “Hot debate.” How is a 22-0 drubbing a “Hot debate”? Didn’t this blog used to hide posts that got such lousy responses? What’s happened?

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  5. Andreas Moser says:

    Hidden due to low comment rating. Click here to see.

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    Hidden due to low comment rating. Click here to see.

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  7. Manuel says:

    Why would anyone take this kind of loan instead of using the money they would be turning in as collateral. Maybe it looks suspicious to the bank that you are making this trick just to gain more credit.

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    • DaveyNC says:

      Leveraged return.

      Thumb up 3 Thumb down 3
    • grover says:

      Of course he wants to build credit! He specifically SAID he wants to build credit.

      “So, in an effort to build credit (and a good relationship) for our business with a major U.S. bank…”

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    • pawnman says:

      His stated goal was to build credit, with the hope of securing a larger loan with less collateral in the future.

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      • Craig says:

        Hidden due to low comment rating. Click here to see.

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  8. Jason says:

    Here’s what you make of it: Some banks are more competent business partners than others. Leave this bank and don’t return. There will be others who share your logic and will gladly lend you the money.

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