Whether to fund start-up costs, support business growth or tie you over when trading through rougher times, businesses have conventionally turned to banks as a trusted and known source. But as many business owners can attest, securing bank finance is not always an easy and straightforward process.

The market for SME lending in Australia is widely regarded as potentially $150 billion a year, yet only $77 billion a year is lent to SMEs. The big four banks lend the bulk of this, accounting for $70 billion. This indicates that only half the market is successful in accessing capital each year.

What’s even more frustrating is that banks will not always disclose why the loan application is 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 SMEs, 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

Business loan applicants often struggle in providing sufficient documentation on two crucial areas: cash flow and a detailed business plan.

While established businesses have tax returns, years of sales and a reasonably 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 is more than an anomaly.

Still, 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.

Therefore, applicants may not have enough resources to secure a loan for the desired amount.

4. Start-up businesses with no track record

Seeking bank finance without or with limited 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.

So what can you do if the bank knocks you back?

For SMEs wanting to maximise their chances of gaining finance, other finance options like alternative small lenders can help business owners regain control over their financial situation.

Alternative lenders can provide fast turnaround times for approvals and capital, efficient online application processes, flexible loan terms and cash flow-based repayments – all of which are empowering for business owners and ensure they aren’t feeling pressured by banks.

Mark Hearl is the founder of specialist SME lender Sprout Funding and has over 16 years of experience in the finance industry. 

Why your bank is rejecting your loan application

Mark Hearl

Last Updated: 26 October 2017 Published: 16 May 2017