Prospective clients often find their way to us as they have approached their own bankers to support their borrowing requirements and are astounded after years of loyalty to the bank concerned, their applications are being rejected.  Indeed according to the Institute of Directors “… nearly 60% of businesses seeking bank finance in 2009/10 were rejected by their bank”.

According to research from a credit reference agency often used by the banks and the Forum of Private Business (FPB), a fifth of all small business owners who have been refused a loan are completely in the dark about why they were rejected.

The most common reason given to businesses that are told why their loan was denied is inadequate security. More than 40% were given this reason but the lenders are not pursuing the government backed opportunities to get around issue.

Computer Says NO!

A further 30% were dismissed because the sector they operate in is deemed “high risk”, while 27% are let down by their credit score. 

The former is difficult to challenge because it is subjective and we have no access to the lenders own level of experience in the relevant sector, we can only rely on general business sentiment and I think in certain circumstances that is all the lender’s underwriter is doing. 

The latter is again difficult to challenge as despite what an individual business’s (or the owner’s/director’s) credit score is, the lender sets the threshold level to suit their purposes.

Martin Williams, managing director of credit reference agency Graydon UK, said: “It is vital that business owners and managers enter into a conversation with their bank in order to find out where their perceived business challenges lie. This will allow them to address these issues in future applications, considerably improving their chances of securing funding”. 

We would add here that this is an admirable approach but one often where one comes against a brick wall as your own bank contacts (the ones you got on well with before) are now so divorced from the underwriting process they are often in the dark themselves as to the thinking behind the decision as to be in a difficult position to advise.

We always suggest that some form of feedback is obtained why the refusal of support was given, and indeed we ask for it if it is not volunteered, but unless we were the originators of the application, the lenders will not tell us and it is up to the business owner themselves to get the right answers, and if they feel they are out of their depth here, we can help.

Phil Orford, chief executive of the FPB, said business owners needed to make sure they were presenting proper financial information, but also called on the banks to provide detailed reasons when loan applications are turned down.

“We have entered a new business landscape where a more collaborative approach between businesses and banks is required if the future of enterprise and the economy is to be a healthy one,” he said.

“Securing finance is the main priority of the vast majority of small businesses. Economic conditions remain extremely tough and, even when the economy does recover substantially, growth finance will be important to allow them to keep up with demand.”

Our aim at CFA is to ensure that all viable applications are presented in a format that the lender will understand, with all the background information we know will be sought and explore the options open to the applicant moving forward.  We are generally successful in obtaining a workable lending solution, but only because we have done our homework and preparation first to ensure we are painting the right picture, and of course do not waste everyone’s time submitting applications to lenders who patently have no appetite for our applicant’s business.

We can help at the early stage in preparing a robust business plan that not only looks at the strengths and weaknesses of the proposal, but goes deeper into the micro and macro opportunities and threats that need to be addressed.

If you have had a challenge, working with your existing bank, give us a call and let us see if we can help.