5 reasons banks refuse loans (and what you can do instead)
Has your small business finance application been rejected? There are various reasons that banks may have turned you down, but you could have other options.
Accessing finance is a major challenge for small organisations. This is despite the fact they are the engine room of the economy, employing almost 5 million people and producing one-third of the country's business output, according to the Reserve Bank of Australia.
But why are financial institutions sometimes reluctant to lend to SMEs? Let's examine the most common reasons why banks turn down small business loans, as well as look at what other steps you can take instead.
1. Cash flow issues
Ensuring short-term liquidity and cash flow was the top reason that businesses sought finance in 2015-16, Australian Bureau of Statistics (ABS) research shows. However, this sometimes places organisations in an unfortunate catch-22 dilemma; they may need finance to maintain adequate cash flow, but banks often reject loan applications if SMEs don't have enough money on hand.
2. Poor documentation
Established organisations tend to have tax returns, future earnings predictions and sophisticated business plans to obtain finance. However, many new SMEs may not have sufficient documentation to show they have a proven track record of profitable performances. This lack of financial history and a comprehensive strategy for the future can make banks wary.
3. Low credit score
Unsurprisingly, negative marks on a business's credit file are a huge red flag for financial institutions. What many people may not know is that banks will also check the personal credit score of a CEO or director of a company. SMEs may therefore get rejected for loans if the owner has bad credit, even when the business itself has the all-clear.
4. Investing in second-hand assets
Nearly three in 10 businesses seek finance to replace existing machinery or upgrade other equipment, according to the ABS. While second-hand assets can offer a cost-effective and lucrative investment for many SMEs, banks tend to assess previously used equipment as a bigger risk than buying new.
5. Too much existing debt (or not enough collateral)
Businesses that already have significant debts are likely to struggle extending their lines of credit with many lenders. Banks also usually require SMEs to pledge assets - such as property, vehicles or equipment - as collateral to provide security on loans. Without the necessary assurances, financial institutions may not be willing to take the risk.
What are my options if my loan application was rejected?
Receiving a business loan rejection is disheartening and could put the future of your organisation in jeopardy. But don't despair; you may still be able to access alternative finance solutions. To find out how our extensive range of business finance solutions can support your SME when other lenders have let you down,