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).”


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.


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.


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.


I wouldn't approve a loan like this either. Your $50K collateral will most certainly NOT be worth $50K (in buying power) in 5 years. If it's U.S. dollars, it could be useful only for wallpaper and toilet paper. So perhaps your collateral is not good enough. Inflation favors the borrower and not the lender; hyperinflation wipes out the borrower while the lender continues to enjoy the assets purchased with the loan.


...meant to say "hyperinflation wipes out the lender while the borrower continues to enjoy the assets purchased with the loan."


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.

Andreas Moser

He should have brought gold.


Dont blame the bank, blame the regulators! Banks can only lend what the borrower has the capacity to repay, irrespective of the collateral. Regulators scrutinize every loan produced by banks now and they face fines should the bank not meet the criteria set forth by these regulators!


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.


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.

Tall Man

Loan is very very safe, but not actually perfectly safe like author seems to think. Cash would still be in the name of H, but bank would have lien on it (and yes, very ready access to the money). However, bank's lien would be subordinated to government lien, like for unpaid taxes. A bankruptcy of H might also bring in some equitable claims that might be senior to the bank. They shouldn't but a bankruptcy judge could find that repaying the bank out of the cash collateral should take a back seat to returning cash stolen from a little old lady in some sort of fraud. All seems unlikely but it could happen. So no, bank should not be willing to do this loan for trillions of dollars. Why they picked $25,000 as the cut-off, I have no idea. Frankly, I have no idea why any major bank would be interested in loans of such a small size. I think, actually you are seeing that they aren't interested. You are too small a fish for them to even bother with. Come back and have a business case for a $50 million loan and then you will be worth discussing and thinking about for a major bank. Otherwise, I suspect that the bank would rather you just go away.



I'm confused: If they had the 50K in the first place, why did they need a loan of the same amount?


It seems like a credit-rehabilitation-type loan.

An individual with poor credit can take out a loan, secured in such a way (ie. with cash), and repay the loan over a year or two, getting the cash back at the end. The lender's risk is mitigated by having the cash, and the borrower gets a number of positive, "paid as agreed" marks on their credit report. Those entries, combined with time, can improve the borrower's credit score significantly, allowing them to get significantly better loan terms later on. If the borrower gets a $1000 loan at 10% for a year, they're effectively paying $54.99 (the total interest accrued) for a year's worth of positive entries.

Following that loan, say they want to buy a house; a 30year, $100k mortgage at 10% apr will have a monthly payment of $877.57, while the tiny reduction to 9.5% will drop the payment to $840.85 (or $36.72/month). If they can drop their rate a whole percentage (to 9%), their payment drops to $804.62, saving $72.95/month).

I imagine that companies can do much the same, and it sounds like that's what the company in the post was effectively trying to do.



Perhaps, also, the bank decided that the company in question might be a bad risk for the interest on the loan at $50k but no $25k?

At 5 years, that $50k loan's monthly payment is nearly $1000 (59 x $965.48 + 1 x $965.32), and will accrue $7,928.64 in interest.

A $25k loan will require monthly payments that are about half (59 x $482.74 + 1 x $482.69), and will accrue "just" $3,964.35 in interest.

So, perhaps the bank doesn't think that the company will be able to come up with $1000/month to pay off a loan, but that $500/month is do-able.

Or, since this is a "credit rehabilitation"-type loan, perhaps the bank does put a hard cap of $25k on those kinds of loans.

Or, there's more to the story that we don't know (eg. how's the company's credit history?) which affects the bank's decision but wasn't laid out.

We all like free money (even banks), but $4-8k over 5 years isn't exactly bend-over-backwards money, and there are still risks (Tall Man suggested a few others, related to bankruptcy and taxes).

Maybe making smaller loans, especially when they serve the same purpose as a larger loan, is a good idea for all involved.



Much ado about nothing. If establishing credit is the ultimate goal then $25000 in credit would do it. If that is the banks decision then get over it and stop whining. I'm sick of everyone whining about banks and everything else today. There are few industries with as much competition as banks. Go somewhere else.

Joe J

The bank may have also been afraid of getting involved in illegal money laundering. As I understand it, taken from one of the lethal weapon movies. Drug dealers would do this kind of loan, and never pay it back. Basically:
Police, " Where did you get your money from?"
Drug dealer, "From Bank XYZ, heres the loan paperwork"

Bank wouldn't care much if loan isn't repaid, since they had the, original "dirty" money as colateral.

All in all, if something sounds too good to be true ,like this loan, it probably is somehow, and you just aren't seeing it, ot it's illegal.

Mike Johnson

Building "business credit" is not like building consumer credit, at least for my institution. They dont care if you actually pay your bills, just that you have the capacity to pay your bills, and if your business goes under, do you have personal guarantors with other sources of income to take over the payments. Collateral in excess is not really relevant unless its a short term bridge type loan.


Seems obvious to me that some combination of regulation/bureaucracy have obviated the need for thinking and logic and reduced decisions to tables and policies accessible by the obliviously obedient. Great breeding ground for a black market!


It's a bad business move for H to begin with—he's just donating nearly 6% payments a year to the bank for no reason. He doesn't need to build up credit with them, he needs to build up cash flows for his business.

But, putting that aside, Geoffery's inflation argument only holds water if inflation exceeds the interest rate—which at 5.95 would be almost unfathomable coming out of a recession. This is a most bizarre story.

Someone mentioned lien/foreclosure costs, but would that really apply if the bank already had the $50k they were holding as collateral, as the email made it sound?

Eric M. Jones.

By making the terms of the loan too-good-to-be-true, the borrower has raised some red flags. Makes sense to me--I suspect that some smart guys out there can map a scenario where the bank gets screwed.

I wouldn't make the loan either.