Why Has My Business Loan Application Been Rejected?
Having a business loan application rejected can be frustrating, particularly when I believe the business is perfectly capable of repaying the money.
However, a rejection does not necessarily mean that the lender thinks my business is doomed to fail.
Business lenders assess risk according to their own criteria. One lender may reject an application that another is prepared to consider.
Before immediately applying somewhere else, I would try to understand why the first application failed. Fixing the underlying problem can improve my chances of obtaining appropriate finance and, more importantly, may reveal something about the financial position of my business that I need to address.
My Business Does Not Have Enough Trading History
This is a common problem for new businesses.
An established company can provide accounts, bank statements and years of trading information. A business that started six months ago cannot.
The lender therefore has much less evidence showing whether my business can generate enough money to make repayments.
I would look specifically for startup finance rather than repeatedly applying for products requiring an established trading history.
Government-backed Start Up Loans are one option for eligible young businesses.
The Lender Does Not Think I Can Afford The Repayments
Affordability is fundamental.
I might believe that a £30,000 investment will transform my business, but the lender needs evidence that repayments can actually be made.
If existing profits and cash flow leave very little spare money each month, the lender may decide that adding another financial commitment creates too much risk.
I would examine the figures myself.
If the repayment looks uncomfortable in my own cash-flow forecast, rejection may be protecting me from taking on unsuitable debt.
My Credit History Is Causing Problems
Credit history can affect a business finance application.
For a sole trader or young company, my personal credit history can be particularly important because the business may have limited financial history of its own.
I would check my credit reports for incorrect information.
If previous financial problems are accurate, I would investigate business loans with bad credit rather than making repeated applications for finance designed for lower-risk borrowers.
I would also remember that a poor credit history does not make expensive borrowing affordable.
The Business Already Has Too Much Debt
A lender will consider my existing financial commitments.
If a large proportion of business cash flow is already being used to service loans, credit cards, asset finance and other borrowing, another lender may be reluctant to add further debt.
I would calculate the complete monthly finance commitment rather than viewing each loan separately.
Sometimes the problem is not the proposed new investment but the accumulated burden of everything the business has already borrowed.
My Cash Flow Is Too Unpredictable
Profit and cash flow are not the same thing.
My accounts could show a profitable business while the bank account regularly runs dangerously low because customers take a long time to pay.
A lender wants confidence that cash will actually be available when repayments fall due.
If late customer payments are the problem, I might investigate invoice finance or improve credit-control processes rather than automatically taking a conventional loan.
I Asked For Too Much Money
Perhaps the lender would consider £20,000 but not the £50,000 I requested.
I would review exactly what the money is needed for.
Could I divide the investment into stages? Could some equipment be leased? Is there grant support available for part of the project?
Reducing the borrowing requirement can sometimes make the application more realistic.
I Have Not Explained What The Money Is For
A vague application can create unnecessary uncertainty.
If I ask for £40,000 “to grow the business”, the lender has relatively little information.
I would provide a clear explanation.
Perhaps £25,000 is for machinery, £10,000 for additional stock and £5,000 for marketing associated with a new product.
I would then explain how that expenditure is expected to increase revenue and generate enough cash to service the debt.
My Forecasts Are Not Convincing
An optimistic forecast is not automatically a strong forecast.
If I predict that sales will triple next year, I should be able to explain why.
Perhaps I have signed a major contract, increased production capacity or have clear evidence of customer demand.
Without evidence, dramatic growth projections can make an application look less credible rather than more attractive.
I would prepare a realistic base case and consider what happens if sales are below expectations.
The Business Is In A Sector The Lender Does Not Like
Different lenders have different risk appetites.
A lender may restrict lending to particular sectors or view certain industries as higher risk.
That does not necessarily mean another lender will reach the same conclusion.
I would look for providers familiar with my industry rather than trying to persuade a lender whose policies make my business a poor fit.
I Cannot Provide The Security Requested
A lender may be willing to provide finance only if appropriate security is available.
For a limited company with few assets, the lender might instead request a personal guarantee.
If I am unwilling or unable to provide it, the application may not proceed.
I would investigate business loans without a personal guarantee, but I would recognise that removing protection for the lender can reduce my borrowing options.
Should I Immediately Apply Somewhere Else?
Not necessarily.
I would first ask whether the lender can explain the decision.
It may not provide every detail of its internal scoring system, but I might discover that the problem is trading history, affordability, credit information or missing documentation.
That knowledge can help me decide what to do next.
Making numerous applications without understanding the first rejection can be counterproductive.
The Bank Referral Scheme May Help
If one of the UK’s designated major banks rejects an eligible SME finance application, the Bank Referral Scheme can provide another route.
With my consent, participating banks can refer information to designated finance platforms.
Those platforms can potentially match the business with alternative finance providers.
The scheme exists partly because a rejection by one bank does not necessarily mean that another provider will not finance the business.
I would therefore ask whether a referral is available if my bank turns me down.
Alternative Finance May Work Differently
Banks are not the only source of business finance.
Depending on what I need, alternatives can include asset finance, invoice finance, specialist business lenders and other providers.
The appropriate choice depends on the underlying problem.
If I need a machine, asset finance may be logical. If cash is trapped in unpaid invoices, invoice finance could be more relevant.
I would not automatically replace a rejected cheap loan with an expensive generic loan.
Could A Grant Reduce The Amount I Need?
Potentially.
If I am borrowing for equipment, energy efficiency, innovation or another defined investment, a grant could contribute towards the project.
I would investigate local business grants before borrowing the full amount.
Grants are targeted and competitive, so I cannot rely on finding one, but reducing a £40,000 borrowing requirement to £25,000 could materially change the finance calculation.
A Rejection Can Be Useful Information
I would not take a business-loan rejection personally.
Instead, I would use it as an opportunity to stress-test the financial case.
Does the business genuinely generate enough cash? Is the investment necessary? Have I asked for too much? Is the proposed type of finance appropriate?
If the fundamentals are strong, another provider may take a different view.
If the fundamentals are weak, fixing them before borrowing may be considerably more valuable than finding a lender prepared to say yes.
