What to do if you have been refused bank borrowing

My business has been refused a bank loan. What other company finance options are available?

Introduction

Whether your firm is a new venture or firmly established, facing obstacles in obtaining vital business finance is not unusual. If your bank or another potential finance source has turned down your request, various factors could be behind this decision.

In this guide, we explore the factors and reasons for a business being refused a loan or other finance forms. We will also showcase alternative funding choices and offer guidance on the best course of action if you are encountering difficulties in locating the appropriate lender.

It’s important to understand from the start that being declined by one or more lenders doesn’t ‘blacklist’ your business or render it ‘un-lendable’.

The financial track record of your business is the most crucial indicator when applying for finance. For new businesses without credit history and trading figures, obtaining even a modest business bank loan is traditionally challenging – a challenge not eased by the financial crisis of 2007/08 and its ripple effect throughout the industry.

Despite a slight increase in small business lending in recent quarters, it remains an application that typically garners a negative response.

The reason is straightforward – it all boils down to risk. Lenders prefer to see, in concrete numbers, that your business has a history of meeting its obligations, particularly repaying borrowed funds. When this financial track record is absent, your business poses a significant risk to the lender. Many mainstream banks may subject your application to automated analysis and reject it for not meeting the necessary criteria. Essentially, you’ll receive a ‘computer says no’ response based on your business’s lack of financial history and the associated risk.

 

It’s crucial to understand that lenders are not investors. They don’t assess your business plan like a Dragons’ Den investor and decide to invest in exchange for equity because they believe your business has potential. Instead, they rely on a straightforward risk-based evaluation of your company’s financial history. Without any financial background to evaluate, a lender cannot determine whether your venture will be successful enough to repay any borrowed funds.

For more established businesses with a proven trading history, obtaining crucial business finance is generally less challenging. However, banks and other lenders may still decline an application if they perceive the loan to pose considerable risk.

A significant advantage that larger firms have over SMEs is the quality of their applications. Established businesses often possess more knowledge about potential finance options and have an internal finance team or a finance director with the expertise to compile a detailed and credible bank loan application. In many cases, a startup or relatively small business owner may attempt to secure finance independently without the necessary experience or expertise to build a compelling case.

 

Reasons for Business Loan Rejection

In general, the most prevalent reasons for a business facing finance rejection are:

I. Adverse Information – Banks and other lenders decline to offer finance when the business poses an excessive risk. The business may have a history of CCJs or have received a statutory demand in the past. Alternatively, even with a clean credit file, the business may face refusal based on other criteria, such as insufficient details in the loan application or requesting an amount beyond the lender’s willingness to provide.

II. Lack of Security – In many instances, a lender will seek to protect their funds by accepting a form of security, such as a personal guarantee. Here, a business owner assumes responsibility for the loan. In the event of an inability to repay, they secure it against an asset like machinery or vehicles (asset-based finance) or even their residential property (secured lending). A business owner may also approach a friend or family member to serve as a ‘guarantor’ for the loan. In case of the business defaults, the guarantor can repay the bank on behalf of the business owner. Securing the loan significantly increases the likelihood of a lender providing capital.

III. Lack of Service Ability – The bank evaluates the application and believes that the business cannot manage the debt adequately, meaning it may struggle to make regular repayments or adhere to a schedule preferred by the lender. If the business already holds a fully utilised overdraft with the bank, which remains unpaid over time, the bank might interpret this as an indication that the business poses a risk.

IV. Poor Preparation – Rushed or poorly prepared applications are likely to result in a negative response. Many business owners find it challenging to grasp precisely what a lender requires, making it advisable to seek assistance from an accountant or financial advisor in preparing the application. If the application lacks vital information such as accounts, forecasts, and a business plan, the lender will promptly reject it.

V. Time Frame – Banks typically take their time processing a loan application. If your business is facing challenges and needs a swift injection of capital to facilitate company expansion, address cash flow issues, or mitigate the risk of financial strain, it may be impractical for the bank to furnish the finance within the specified time frame.

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What Other Business Finance Options are Available?

If your business consistently faces challenges in obtaining finance, and it seems like you’ve explored all possible avenues, there may still be a viable option. In this industry, a broker could offer the best chance of securing the necessary funds.

A reliable broker won’t just check loan availability at one or two high street banks but will have comprehensive market access and knowledge of specialist lenders, some of which you may not be familiar with.

Having extensive knowledge of the market ensures that you can identify the best loan products available, and an independent broker can guide you through the pros and cons of different lenders without bias towards any particular one.

It might come down to a choice between speed and cost, a common dilemma for many businesses. Banks often offer the lowest interest rates, making them attractive, but they typically have fewer options, a lengthy application process, and a higher rejection rate. On the other hand, specialist lenders can respond more swiftly and find the right product for your business needs, albeit usually at a higher interest rate.

There are other options too, including the trendy ‘crowdfunding’ method, which, contrary to popular belief, can be utilised by established businesses, not just start-ups. Crowdfunding can benefit both the borrower and the lender; the business receives a much-needed capital injection (with lenders bidding for the opportunity to invest, allowing the borrower to choose the most attractive terms from the auction-style pitches). Lenders, in turn, can earn themselves a stake in a promising business at a time when other investment opportunities are unappealing due to low-interest rates.  

 

Conrad Ford, a leading business finance industry figurehead, says:

“There are a surprising number of options if you know where to look. Never underestimate the value of an intermediary when looking into alternatives, as there could be several solutions which you might not be aware of – some of which could, in fact, be better suited to your needs than the finance you were rejected for in the first place.”

If you aim to secure the most suitable loan for your business, you can schedule a free initial consultation through Vanguard Insolvency, which collaborates with some of the UK’s top financial brokers possessing extensive market expertise.