Why Mid-Market Loans Don't Close: Barriers to Funding

The road to loan approval is often a winding one. The term sheet negotiations are usually complex and lengthy as both parties negotiate a favorable outcome. But once a borrower receives term sheets, the work isn’t over. Term sheets are non-binding and are designed to signify a bank or lender’s conviction in funding your business. Even after a borrower signs a term sheet indicating they want to move towards closing, the deal can fall through for a number of reasons. It is important to understand how and why loans fail to close. Armed with this knowledge, you may be able to avoid common mistakes and, hopefully, successfully close a loan with ease.

According to the Federal Reserve, most banks reported having tightened standards on business loans to firms of all sizes over the second quarter of 2025. This landscape highlights how vital it is to understand all obstacles in the loan process.

Key players in the loan approval process

Let’s recap the critical roles involved in loan approvals process. Knowing who has the power to push a loan through to the next step is important.

Relationship manager

They act as “sales” person for the lender. They are responsible for sourcing and securing new opportunities to the bank. They are actively engaged with clients, pitching new prospects, handling initial phone conversations, and disseminating loan requests to the appropriate department. Most likely this individual is your primary point of contact and will relay any news (good or bad) to you directly. But take their word with a grain of salt. The relationship manager cannot approve loans on their own. They must get the buy in from others within their institution. It is very important to understand all the parties that need to agree to move forward.

Credit officers

Credit officers are tasked with protecting the institution from making bad loans, which is different from the relationship manager who is tasked with bringing in new loans and borrowers. Credit officers will be very knowledgeable about underwriting policies, collateral requirements, and other technical elements of the transaction. Typically credit officers are not compensated when deals close, but rather are reprimanded when deals go poorly. As such, they are much more focused on risk mitigation rather than closing loans.

If the borrower receives a term sheet that has not been reviewed by a credit officer then the term sheet is probably not a good indication of the lender’s interest or ability to close. It is very important to make sure to get the credit officer’s feedback and then to ensure that all of their concerns are addressed in the loan structure before committing to a lender or putting in an underwriting deposit.

Loan committee

The loan committee is the decision making body that ultimately clears a loan before the lending institution can sign off. The loan committee is usually comprised of multiple people including decision makers from both the credit and sales sides of the lending institution.

Too many borrowers make the mistake of only interacting with one point of contact throughout their underwriting process. Smart borrowers push to interact with at least two people who will be on the committee. Having more than one advocate will certainly help in getting the green light from the loan committee.

The Journal of International Money and Finance found that the size of a bank are major influences in determining lending outcomes for small and medium-sized enterprises – reinforcing the importance of choosing the right institution for your needs.

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Steps to loan close & what can go wrong

There are many steps between the term sheet and loan closing. While banks and lenders loan processes can vary, they generally include the following steps:

1. Review of historical and interim financial statements

Make sure your financials are up to date and accurate. Ensure that you have consolidated statements if there are multiple borrowing entities. Many lenders will request accountant prepared statements but will accept company prepared interim statements. If you do not have accountant prepared historical statements, be prepared to hire an accounting firm to handle these. Many times the loan will be contingent on delivering these.

2. Review of pending litigation

If you are aware of any pending litigation against the borrowing entity or any of its owners, it is best to inform lenders about these prior to term sheet negotiation. By informing them of this upfront and crafting a careful narrative around the situation, the borrower has the best chance of overcoming the lender’s fears. If the lenders discover the litigation in diligence, the relationship can become more strained and sometimes it’s harder to explain.

3. Appraisals for assets supporting the loan

The lender will request a third party appraisal of assets that are used as collateral. The lenders need comfort in knowing that if cash flows can not support the loan payments, the assets can be sold off at a high enough value to cover the bank’s loss. If the appraisals come back significantly less than the borrower’s internal estimates, then it’s likely the loan amount could decrease from the original term sheet. Cerebro recommends that the borrower request another appraisal by a separate company if the first appraisal returns unreasonable values.

Note that the borrower will have to pay for the appraisal but it is sometimes worth getting a second opinion.

4. Background checks on guarantors & owners

As with any pending litigation, it’s in the best interest of the borrower to be upfront and forthcoming with lenders regarding any prior bankruptcies, SEC violations or other issues the owners and guarantors might have had in the past. These will come out when the lender does an in depth background check. Any surprises will put a bad taste in the lenders mouth and will be harder to overcome.

5. Stress testing of revised forecasts

The lender will need to create and run a model based on the financials and projections provided. They will test to see whether the company can support the debt service (principal and interest payments). They will also run multiple stress scenarios to see how sensitive the company is to drops in revenues and the loss of customers. Often the companies with a diversified customer base and a larger amount of variable costs tend to fare better in those stress tests; however, every situation is different. The point is that banks will run those scenarios and smart companies maintain control of the narrative by preparing those scenarios for the lender since they understand the drivers of their businesses better than the lender.

Get the Financial Modeling Do’s and Don’ts Guide >

Benefits of a third party advisor

Most companies don’t have a capital markets team that is regularly handling debt placements, reviewing term sheets or negotiating with lenders. Most companies do this only once every three to four years at best. Advisors are in the market every day and have experience running credit RFP processes. They can be the critical piece in helping secure financing and successfully closing a loan.

When selecting an advisor, ensure they are knowledgeable enough to craft a narrative that appeals to credit committees. It’s one thing for an advisor to tell you which lender to call. It’s another thing entirely, to have them advocating for you at each step from identifying the lender to closing. Advisors are even more critical in the case where a company has a stumbling block or a dip in their financial performance. These are not obstacles but rather areas where an advisor can help strategize a story.

What makes Cerebro Capital different?

Cerebro’s transaction team is comprised of debt placement experts, many of whom have worked at commercial banks and lending institutions. Having sat on the other side of the table, they know what it takes to negotiate favorable term sheets and get a loan approved through a credit committee.

Additionally Cerebro’s team uses transaction data collected from the Federal Reserve, underwriting criteria from its diverse lender network and other data sources to clearly understand the private loan markets and anticipate the terms specific companies could command.

Recent findings cited by Reuters reveal that 77% of small business owners are now concerned about their ability to access capital, and many are encountering unfavorable or even predatory loan terms. Cerebro Capital’s resources and expertise are designed to help businesses assess multiple offers and make informed, strategic decisions in this tighter lending climate.

Cerebro offers a complimentary analysis where our team can identify the strengths and weaknesses of your deal before talking with any lenders.

Frequently Asked Questions about Corporate Lending

What are the best corporate lending options for mid-sized businesses?

Mid-sized businesses benefit from a range of loan products, including term loans, SBA loans, asset-based loans, and revolving lines of credit.. Cerebro Capital connects companies to a diverse network of lenders, enabling access to flexible and tailored corporate lending options. These solutions are designed to meet the fast-changing needs of today’s mid-sized companies.

 Which financial platforms offer reliable corporate lending solutions?

Cerebro Capital’s digital marketplace is a proven platform for sourcing corporate loans from traditional banks and non-bank lenders. Fintech marketplaces like Cerebro Capital streamline the application and approval process, offering data-driven matching and reducing loan approval times by up to 40%.

Where can I find information on corporate lending practices and regulations?

Companies can explore Cerebro Capital’s resources section, which features in-depth guides and compliance tools, to stay updated on lending best practices and industry regulations. Additionally, consult regulatory bodies such as the Federal Reserve and SBA for up-to-date compliance information. It is difficult to stay ahead of the changing lending practices and regulations, and it can be best to engage experts or fractional Capital Markets teams, such as Cerebro Capital.

What characteristics define the most effective corporate lending strategies?

The most effective strategies leverage risk-based pricing, regulatory compliance, and technology-driven underwriting. Cerebro Capital uses data from multiple sources to enhance risk evaluation and loan matching, helping businesses access capital securely and efficiently.

Who are the top lenders in corporate lending for mid-sized companies?

Cerebro Capital maintains a network of  top-tier middle market lenders, including national banks and innovative debt capital providers., Cerebro’s marketplace ensures mid-sized companies have access to the right lender for their needs.

What pain points do businesses face when seeking corporate lending?

Common obstacles include extensive documentation required by traditional lenders, unclear approval timelines, and a lack of tailored financing options. Cerebro Capital simplifies the loan search process, matches borrowers with suitable lenders, and provides strategic direction to overcome these barriers.                        

How does collateral and interest rate impact corporate loans?

Interest rates and collateral requirements vary based on a company’s credit profile. With Cerebro Capital’s marketplace, borrowers can compare term sheets and understand how collateral may influence loan terms and cost of funds.