The Six Stages of Borrower Denial

When times get tough, the credit markets can offer useful options. But there are certain realities that must be faced.

Last month, I received a call that should have come nearly two years earlier. A long-established borrower with solid collateral spent 21 months in a workout with a major multinational bank but never developed a meaningful turnaround plan. When the borrower finally contacted me asking for financing or banking alternatives, I had good news and difficult news.

The good news: financing solutions were still available, though they had gotten more expensive. The difficult news: because there was still no turnaround plan—no document explaining past issues, corrective actions, or why the business should be seen differently now—we couldn't take the opportunity to the lending market; a borrower's collateral means little if they cannot explain their situation in a coherent manner with a plan to move forward that a lender would understand and buy into. 

Borrowers in financial distress follow predictable stages of denial. The details change, but the pattern is consistent. Meanwhile, the lending market moves on, options vanish, and borrowers adjust to reality.

The first stage is, “My bank will work with me.” This is the loyalty trap. You’ve known your banker for years and always paid on time—until recently. It’s natural to believe your relationship has weight when problems arise. And it does, to an extent, but not as much as most borrowers think. Banks ultimately base decisions on numbers, risk, and policy. Once a loan enters a workout, the manager tends to lose authority. The relationship doesn’t necessarily follow the file.

The second stage is, “This is temporary.” Every business has ups and downs, and it’s easy to see a rough time as just another cycle. But there’s a big difference between a short downturn and a structural problem. Many treat structural issues as short-term setbacks. While they wait for improvement, their financing options quietly shrink.

The third stage is, “I have collateral, so I’m fine.” Collateral matters, but it doesn’t fix an unbankable situation. I recently received a call from another entrepreneur who has substantial receivables but also ongoing litigation and an inadequate credit line. The owner wanted a larger facility, but despite his collateral, he wasn’t bankable. Lenders assess assets, risk, uncertainty, and repayment. Until concerns are addressed, collateral alone won’t solve the problem.

The fourth stage is, “I just need more time—or a bigger line of credit.” Here, borrowers search for the wrong solution. They chase more credit when a different approach may be needed. Sometimes, a private lender, restructuring, or intercreditor agreement is the answer. Problems are often solvable, but not if the borrower insists on solutions the market has already rejected.

The fifth stage is “I’m ready to move,” but then they arrive unprepared. At this point, the borrower finally recognizes the need to act, yet still lacks the information and documentation lenders require.  Irrespective of what stage you are in, it is imperative that your financial records and books be kept in order. Otherwise, the potential lender is going to walk away.

The sixth and final stage is, “Somebody will say yes.” At this point, borrowers begin calling every lender, broker, advisor, and contact they can find, hoping someone will provide the answer they want to hear. Occasionally, that strategy works, but more often it simply consumes valuable time while available options continue to disappear.

Here’s my key takeaway: The lending market isn’t personal—it responds to facts, not individuals. Accept the data, create a plan, and adapt early to keep your options open. Don’t wait for reality to change; timely action leads to better outcomes.

Lenders need a current, credible story about your business’s past actions and future viability. Begin preparing that narrative sooner, not later, to maximize your options.