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Why banks are rejecting small business loans

When it comes to acquiring finance for your business either to get started or expand, traditionally banks have been the popular option; however, with more than half of SME loan applications being rejected by banks every year, banks are proving to be yet another hurdle for small businesses.

Whether it is to fund start-up costs, support business growth or tide you over when trading through rougher times, businesses have conventionally turned to banks, as a trusted and known source.  However, securing bank finance is not always an easy or straight-forward process

The market for SME lending in Australia is widely regarded as being potentially $150 billion a year. That said, only $77 billion a year is lent to SMEs in Australia with the big four banks lending the bulk proportion at $70 billion.  This indicates that only half the market is successful in accessing capital each year.

Even more frustrating is that banks will not always disclose why the loan application was rejected. Some of the common reasons why business loans could be rejected by banks include.

1. Poor credit

Poor credit is often taken as a sign that the applicant either doesn’t take their debt obligations seriously, or takes too many risks. Unfortunately for small businesses, credit evaluations extend beyond the scope of the company and into the personal life of the business owner. A company that pays all of its bills on time can still be rejected for a business loan, if the business owner has a history of poor personal finance.

2. Poor documentation

Small business loan applicants often struggle with providing sufficient documentation in two crucial areas – cash flow and an insufficient business plan. While established businesses have tax returns, years of sales and a reasonable realistic projection of future earnings based on their history, a new business, however, is unable to provide proof of earnings or demonstrate that a year of good sales was more than an anomaly. While a hastily thrown together business plan may not address critical issues the bank will look for in its evaluation, including how the applicant will address the competition or what sets the business apart.

3. Not enough collateral

A common mistake that business owners make is attaching a higher value to their potential collateral than the bank is willing to accept and therefore applicants may not have enough resources to secure a loan for the desired amount.

4. Start-up business with no track record

Seeking bank finance with no past financial history or credentials to prove can be a significant hurdle.

5. Existing High Debt Levels

Outstanding debt obligations can indicate that the business owner is not proficient at managing money, or the business is struggling with cash flow.

For SMEs wanting to maximise their chances of gaining finance, other finance options like exploring alternate small lenders, can help business owners regain control over their financial situation. Alternate lenders can provide fast turn-around time for approvals and capital, efficient online application process, flexible loan terms and cash flow based repayments, which is empowering for business owners and ensures they aren’t feeling pressured by banks.

About the author

Mark Hearl, is a leading business finance expert with over 16 years’ experience in the industry. He is the founder of Sprout Funding, a finance company specialising in small to medium business lending. He previously contributed Could your business use a financial detox.

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Mark Hearl

Mark Hearl

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