When it comes to acquiring finance for your business either for start-up or expansion, traditionally banks have been the popular option, however with more than half of SME loan applications being rejected by banks every year, bank loans are proving to be yet another hurdle for small businesses. By Mark Hearl, finance expert and CEO of Sprout Funding.
Whether it is 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 of additional finance. However, securing supplementary finance is not always an easy and straight forward process with the big banks.
The market for SME lending in Australia is widely regarded as being potentially $150 billion a year, however only $77 billion a year is lent to SMEs in Australia with the big four banks lending the bulk proportion at $70 billion. This indicates that only half the market is successful in accessing capital each year. Even more frustrating is that banks will not always disclose why the loan application was rejected.
So why are these institutions adding to the rollercoaster ride that is starting a small business? Below are some of the most common reasons as to why Australian small business loans could be rejected by banks.
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 small businesses, credit evaluations extend beyond the scope of the company and into the personal life of the business owner as well. For that reason a company that has a good reputation of paying its bills on time can still be rejected for an SME loan if the business owner has a history of poor personal finance.
2. Poor documentation – Small business loan applicants often struggle with providing sufficient documentation in the following crucial areas – cash flow and an insufficient business plan. While established businesses have tax returns, years of sales and a reasonable realistic projection of future earnings based on their history, a new business, however, is commonly unable to provide proof of earnings or demonstrate that a year of good sales was anything other than an anomaly.
Meanwhile 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 industry competition or what sets the business apart. As a small business owner you are accountable for presenting these ideas articulately to be eligible for consideration of a loan.
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 and therefore applicants may not have enough resources to secure a loan for the desired amount. Business owners need to be realistic in what the bank can provide for them, often it is wise to make a compromise here in order to be approved.
4. Start-up business with no track record – Seeking bank finance with no past financial history or credentials to prove can be a significant hurdle in SME loan approvals from banks in Australia. However, a positive tip is to exude passion for your business in the process in order to boost the likelihood of a loan approval.
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. Similar to bad credit this demonstrates that the applicant either doesn’t take their debt obligations seriously, or takes too many risks.
For SMEs wanting to maximise their chances of gaining finance, other finance options like exploring alternate small lenders, can help business owners regain control over their financial situation. Alternate lenders can provide fast turn-around time for approvals and capital, efficient online application process, flexible loan terms and cash flow based repayments, which is empowering for business owners and ensures they aren’t feeling pressured by banks.
Sprout Funding provides funding for small businesses in Australia. Sprout Funding is a different kind of finance company, designed to meet the specific needs of small businesses.
The difference is noticeable right from the start. From having flexible terms, to approval criteria tailored to small businesses the company champion growth by securing funding easier, faster and more manageable. Sprout Funding has two main products; revenue based funding and small business loans. Both products are designed to better represent the needs of small growing businesses.