For the decade prior to 2008 when the Global Financial Crisis hit, small business owners found it super easy to get a loan from their bank. If they had a good reason for the money and had clean credit file then sourcing funds was no problem.
Fast forward to 2017 and getting a loan from a major bank feels like getting blood out of stone. During the financial crises, a lot of money was lost and as such banks are now “Gun Shy”. They have tightened up their lending policies and now you need to tick a lot more boxes if your business is to get a loan.
Below are the main reasons you may get declined and what you can do to increase your chances of approval.
REASON #1 – Not in business long enough
The major banks have been operating for over 100 years so they have access to lots of statistics which would tell them that around 50-60% of new businesses fail in their first 2 years. So, if your business ABN has been registered for less than 2 years you will find it extremely difficult to source bank finance for your small business.
Tip: If you have a family member or friend that runs an existing business they could provide a company guarantee.
REASON #2 – Not enough Security/Collateral provided
Banks are very risk averse. They essentially only want to lend money to businesses in cases where if your business falls over they are not going to lose any money. To make sure of this, banks will want you to provide real estate as security for the loan. If your business falls over they will sell your house and get their money back. Just because your business plan shows that you will be making strong profits with very little risk doesn’t mean you qualify for a loan. Banks think worse-case scenario and often don’t consider your actual business just your real estate security.
Tip: If you don’t own property then the bank will like you to pay a 20-30% cash deposit.
REASON #3 – Poor credit history of company or directors
The first thing that banks will do before considering your application is run a credit check on the business and individual directors. If the credit score of either the business or the directors is too low due to defaults or the number of enquiries then the loan can be declined immediately. Even though the business is borrowing the money, the directors credit file is equally important because they are the ones running the business.
Tip: If there is an issue on your credit file you can use the services of a credit cleaning agency to help you get any defaults removed such as Clear Credit Solutions who will only charge you if they are successful in cleaning your file.
REASON #4 – Concerns over cashflow
Apart from security being offered for the loan the other important criteria the banks look at is your business cashflow. This is your businesses ability to meet its daily, weekly and monthly expenses such as loan repayments, rent, electricity, wages etc.
Tip: To make the banks comfortable with your cashflow get an accountant to prepare a business cashflow predicting income and expenses on a monthly basis. If this is presented to the banks as part of the initial application it will be more likely to be approved
REASON #5 – Directors/Owners lack of experience
Banks put a lot of weight on the operational and business skills of the directors or owners of the business. The operational skills include your ability and experience within the industry your business operates, ie. if you are buying a mechanic workshop, have you worked as a mechanic for long? But equally important are directors skills and experience managing and running a business within any industry. If you have run a business within the same industry it is preferable.
Tip: Think of how you would describe your experiences in your resume or a job interview. You can’t lie obviously but making your experience sounds as good as possible will help.
REASON #6 – Outside factors
Your business may tick all of the above boxes, ie. you have been in business for many years, you have property security to offer, the business and directors credit files are clean, business is showing good cashflow and directors have excellent experience running the business. However, your loan can still be declined for a varied number of reasons, like the industry you work in has been labelled as high risk by the bank, economic conditions, business location or too many competitors.
Tip: If your business doesn’t tick all of those boxes or you don’t have the time or energy to go through the full bank process, check out Proxy Finances loan options.