At Nucleus, we understand how disappointing it can be when your small business loan application gets rejected. No one wants to apply for funding, only to be met with an unwavering “NO!” – but it is a common occurrence amongst many SMEs, so try not to feel too disheartened.
What’s important to remember is that you applied for a reason, so refusing to fall at the first hurdle should be your priority. But what’s also important to bear in mind is that your business loan application was rejected for a reason too and establishing exactly why needs to be your number one focus.
There are various explanations for why your loan application was not approved but try not to be discouraged and instead seek to find out why so you can ensure your application is approved the second time round…
1. You Applied For A Small Business Loan With A Traditional Bank
If your bank rejected your small business loan application, the first step is to find out why. Banks are required to explain the reason behind the denial and under the Small Business, Enterprise and Employment Act 2015, they are legally obligated to refer you to an alternative provider. The scheme was introduced to help businesses struggling to obtain financial help and is designed to improve access to finance for SMEs.
The Bank Referral Scheme itself was the outcome of evidence that showed SMEs tend to approach their main bank when seeking finance – but that if rejected, most simply give up on trying to attain funding rather than seeking alternative options.
Following the 2008 banking crisis in the UK, traditional banks now have stringent lending criteria which a lot of SMEs don’t meet. As a result, thousands of SMEs struggled to access funding when it was needed most which is why the alternative finance sector experienced huge growth. We talked about why banks are losing out to alternative business finance providers previously, so the good news is that small businesses are becoming more aware of their options beyond their current bank.
With alternative lenders, there are many benefits that the banks can't offer, such as more flexibility with repayment terms, more attractive interest rates, both secured and unsecured lending, plus specialist loans for your industry.
2. Your Small Business Is Not As Established As Some Lenders Like
Sadly, younger businesses tend to find it harder to obtain finance in general. Analysis from the British Business Bank found that small businesses aged under 5 years old account for 36% of the business population, yet just over a fifth represent SMEs that are successful with their finance applications.
In fact, the same research found that 16% of SMEs said the reason behind their loan rejection was because they had no credit history or that the business was simply too young.
But the fact that your business is a new player on the block does not mean that it cannot obtain finance. Your SME might struggle to get highly competitive rates with unsecured loans, but there are lenders out there who are more than willing to work alongside new small businesses by offering secured commercial loans.
3. Your Credit Rating Is Less Than Favourable
One of the most common reasons behind a business loan being rejected is that its business credit rating is lower than the lender feels happy with. Your business credit score will be based on the financial history of your company and lenders refer to this before approving a business loan application to ascertain whether your business is likely to repay any debt owed.
Businesses that don’t have a track record of missing loan repayments previously tend to get offered highly competitive interest rates as those types of businesses are less risky to the lender.
On the other hand, businesses that do default or suffer several failed credit applications find themselves in murkier water when it comes to finding finance. Not only will your business credit score impact your ability to borrow, but it will also influence the rates and deals you’ll be offered for other things too, such as mobile phone contracts for the business.
What might be a little confusing is that your business does not have just one business credit score – there are actually several credit reporting companies who have their own methods of calculating a business credit rating.
The credit reporting company used to determine your score will vary depending on which lender you approach, however that doesn’t mean that contacting one of the major credit reporting companies isn’t a good idea. By contacting just one of the leading credit check companies, such as Experian or Company Check, you will be able to view reports that break down your risk score and credit limits.
A few easy ways to build your credit score are as follows:
- Try to take out some form of business credit, whether that is a business credit card or even an overdraft.
- Always pay bills and credit repayments on time. Avoid maxing out your credit if possible.
- If you have accounts you no longer need, close them. Too much available credit can serve to weaken your business credit rating.
- Avoid making multiple credit applications at once. If your application gets rejected, leave some time before applying to another lender as frantically applying for various loans will make your business seem desperate for cash.
- Open a business bank account in your business' name.
- Ensure you always file full accounts with Companies House on time and consider having your accounts audited.
4. Your Market Is Deemed High Risk
For some lenders, there are industries that are deemed high-risk and therefore generally avoided. This is especially the case for more traditional lenders. The construction industry is one example of markets that various lenders choose not to lend to and the recent downfall of Carillion only served to make an already fragile situation a whole lot worse.
But if you operate within an industry deemed risky by lenders, that does not mean that your journey to acquiring funding has to end here. There are alternative lenders who have specialist products catered specifically for these types of industries. Our Construction Finance product is a fine-tuned funding solution for both contractors and sub-contractors working within the construction landscape.
Similarly, restaurants are considered a high-risk industry due to their high-failure rate. In our restaurant-hub, we addressed the unique challenges restaurateurs face and how our Business Cash Advance can help alleviate the problems that commonly arise.
5. Your Business Is Facing Cash Flow Challenges
Cash flow problems are more common amongst businesses than you probably realise. But unfortunately for many SMEs, an inability to demonstrate healthy cash flow will often result in commercial loan applications being rejected. Lenders will want to ensure that your business is capable of making regular repayments, so if your outgoings equate to more than what's coming in, that will be a serious problem and will hold you back from accessing funding.
A fantastic way to keep your cash flow in a good position is to conduct accurate cash flow forecasting. 82% of businesses that become insolvent end up in such an unforgiving situation due to a cash flow crisis. Yet with some time, effort and commitment, you can actually put together accurate cash-flow forecasts to guide you through difficult scenarios that your business will likely face.
We wrote a blog previously explaining why every business should do cash flow forecasting and doing so means you can get ahead of any financial mishap before it starts to cause any real problems for your business.
6. You Don't Have Enough Collateral
Your small business loan application may have been rejected due to you simply being unable to provide enough collateral to secure the loan against. It is important for lenders to leverage assets against the amount they lend and SMEs are often turned down because they either do not have enough collateral or they can't provide the type of collateral the lender requires.
However, collateral in the form of property is not always required in order to attain a commercial loan. If your business lacks residential and commercial property to use as leverage, our invoice finance facility could be the perfect solution to your financing needs. You borrow the loan against your unpaid invoices and this funding can be used to alleviate various challenges, including cash flow problems, to combat late payments and even to avoid raising equity.
For more SME advice and tips, read our related posts below. If you are experiencing cash flow challenges or want to realise your business growth plans, get in touch with our team of Funding Specialists today on 020 7839 9451 or email firstname.lastname@example.org.
12 August, 2019