Why Banks Decline Business Loans

Banks declining loans to small business is nothing new. The real reasons why can be a little clouded, after all you have businesses saying they want to borrow and banks saying they want to lend. Somewhere in the middle is a large disconnect which businesses don’t understand and banks are none to keen to explain.

The main reasons why banks don’t explain decline decisions properly is twofold;

1 – Frontline staff rarely understand the real reasons of how lending is assessed, therefore properly explaining the decline is impossible

2 – The decline can be critical of what the frontline bank manager has done and is contradictory to what they may have already told you

Because of this the decline is never properly understood and we start on the same old circle once again. Let me explain in more detail.

Loan Assessment

Before we do anything else, let’s get a few things clear;

• Banks have preferred and non-preferred sectors, find out where you sit as these sector preferences can change regularly
• Banks will lend for some purposes and not others
• There will always be a maximum amount of borrowing
• Credit standing is important

The first point is easy to confirm. A direct and straight question to your bank should provide your answer. Many frontline bank staff will tell you that the bank will gladly look to lend, if you get that answer then request that the staff member go and check before you apply. It is also key to accept that sometimes banks say no, don’t take it to heart but do be prepared to look elsewhere.

From a purpose perspective, some purposes are never popular;

• VAT, HMRC or other Tax arrears
• Anything that enables the directors to draw more out of the business
• Anything that includes the words ‘need to borrow urgently’ or ‘desperate’

The bottom line is that the best time to borrow is well in advance of needing the money, never borrow when you really need the money. It sounds strange but the more you need to borrow the less likely a bank is to lend to you.

With regard credit standing, banks will look at both internal and external information. Internal information relates to your existing bank, they will look at your current account as their first point of assessment. When it comes to this, bear in mind that;

• A current account over the agreed limit is read by the bank as ‘desperate to borrow’ and ‘ignores the rules’, in other words you are unlikely to keep to any criteria and fall into the ‘need to borrow’ category
• Returned items or bounced payments. As a rule it is not worth applying if you have had any bounced items within 6 months
• Banks don’t like your accounts showing one level of turnover and your current account showing something much lower. Rightly or wrongly, banks don’t really understand cash payments and allocation of cash. Remember that bankers are employed and have never experienced real life tax planning, VAT, cash payments and all the other issues in the SME world

External information is what is out in the public domain. These are things like;

• Companies House information. Are all filings up to date, are the directors credit records clear
• Any company defaults, late payments (yes, even to suppliers), recent borrowing and recent applications all show and are looked at. If you have applied for credit everywhere then your bank will know about it
• Your website will be looked at, make sure that says the same message as you are giving the bank

Different Types of Assessment

In principle there are two ways in which the bank will assess your business loan application. This will largely depend on;

• How much you want to borrow
• How much of the borrowing will be ‘unsecured’

The lower amounts and the more secured borrowing is generally looked at via a more automated system. This means that the system is more judgemental, it looks at sector, highlight financials and external data at an overview level rather than in detail. It is well worth finding out how your bank will assess your application.

Where the amount requested is higher, more unsecured (loan not covered by property given as security) or your business is newer then the frontline staff will need to write a case justifying your loan then seek approval from a credit department. This means a more forensic assessment of your application. In this event getting all your ducks in a row is important. Look at the areas above and make sure you have things covered.

Accept Reality

Sometimes the bank will say no. Sometimes that ‘no’ decision was always going to be made, you just didn’t expect it or were not advised it was likely. Banks are not good at setting customer expectations when a decline is coming.

Where the bank is not the right place for you then accept it. Sometimes you need to look at alternative suppliers just as in any other area of your business. If you are at all unsure whether your bank is the right place to seek finance then please ask and we can guide you accordingly.

There are always good questions to ask your bank manager, but try and understand why banks say no and plan your application to avoid that outcome.

By Dave Farmer

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