Simon Smith FCCA discusses the implications of small businesses applying for bank loans.
If you're a start-up business seeking fundingto get your feet off the ground, raising finance that suits your needs can be far from plain sailing. With a plethora of tasks on your to-do-list in the everyday running of your enterprise, things can be made even more challenging when you’re faced with a small business loan rejection.
If you’ve been refused finance from the bank, it can sometimes lead to concerns about your ability to secure funding for long-term growth. However, it’s important to remember that there’s more than one source of lending available. The British Business Bank estimates that 100,000 businesses have their loan applications rejected each year, representing an approximate funding gap of £4 billion in the UK.
It appears to have become increasingly difficult for start-ups to obtain a loan via the banking route, so some entrepreneurs have turned to alternatives such as crowdfunding. Needless to say, obtaining the right funding can come with hurdles, but securing finance is likely to be more feasible when you explore all of the options available.
Why are applications being rejected?
There are many factors which can account for a loan refusal; one of the key issues being risk. Lenders want to feel confident that their money will be re-paid, but this is far from assured if your enterprise is early stage and has little or no history of meeting financial liabilities. Hence it's a particular problem for start-ups as they're likely to be seen as an unpredictable venture to the bank.
In 2013, the Department for Business, Innovations and Skills found that half of first time borrower SMEs were rejected for finance, resulting in 37% giving up and canceling their spending plans. But, it's important to remember that a rejection from the bank doesn't have to be the end of your business journey.
In 2017, 72% of new loans and 67% of overdraft applications were successful – despite success rates being high, younger businesses continue to find it difficult to obtain finance. The likelihood of a loan application being accepted varies by the age of the organisation. According to the British Business Bank, 16% of smaller businesses said that the reason for a loan rejection was because of not having a credit history or being to young.
What to do next?
If your loan application has been rejected, don’t panic - there are alternatives. With a plethora of capital options, it's understandable that seeking finance can be overwhelming, but all too often businesses only explore their existing banking relationships and are left feeling stranded if it doesn't go to plan.
The good news is that you don't have to rely solely on your bank for finance. There are successful non-traditional methods such as sparking up interest in investors as opposed to just approaching lenders. This is where it's important to understand the differentiation between a lender and an investor.
Lenders rely on a simple risk-based examination of the financials of your business to date. An investor on the other hand may perceive your organisation as having great growth potential, if that's the case then they will likely put money into the business in return for a share of equity. Depending on your circumstances and business plan, it may be easier to acquire funding from investors as opposed to approaching lenders.
The content of this post is up to date and relevant as at 01/05/2018.
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