UPDATE AUGUST 2021. It’s never been more clear that money is the lifeblood of any SME. The COVID-19 pandemic has demonstrated, once again, that cash is king. You can have all the growth in the world but if you don’t have a strong cashflow cycle, you’re in trouble.
Do you know the 10 reasons that are standing in your way for bank finance approval?
Application Denied – Understanding Why Banks Won’t Lend to You and What You Can Do About It
Small businesses of all types often turn to banks for assistance with cashflow. But these traditional financiers often won’t even consider SMEs because of the associated risk. In this article we’ll explore some of the key reasons for this and what you can do about it.
In almost all cases, banks require collateral in order to approve a loan. But this is heavily skewed towards the smaller loans. For example, a bank will require 100% collateral for a loan that’s under $1m as opposed to only 63% for loans that are over $100m. This shows that as a small business owner, you’re at a significant disadvantage. Unless you have equipment, buildings, inventory, or accounts receivables to pledge as collateral, you’re simply not going to get the loan.
But this is not the only reason that your loan application is rejected. In fact, we’ve got 10 different reasons for you. Each one speaks to a challenge that small businesses of all kinds face. If you can take these on board and improve where needed, you give yourself a much better chance of being financed.
Governments closed borders, imposed lockdowns, restricted businesses from operating and shut down international travel.
Did you move to build an online presence?
Has you Bank tightened lending criteria, thanks to COVID-19?
Is your Bank standing by, while you scramble to save your cash flow?
10 reasons the Bank won’t Lend you Money
It can be frustrating when small business owners are denied again and again by banks when the application seems totally reasonable to you, especially if they’re not clear about their reasons for rejection. There are an enormous number of reasons banks will deny financing, and each case is unique, we’ll dive into alternative SME money. Firstly, here are the ten most common reasons why the bank won’t lend you money.
1. Unstable Cash Flow
Banks want to know that you’ll be able to make your repayments on time every month. If your business receives its cash in a haphazard fashion, this makes it harder to guarantee your repayments. This is particularly tough for seasonal businesses who don’t have consistent cash flow throughout the year. The lack of consistency is a big red flag for a bank who are only concerned about managing their risk. The more stable your cash flow cycle is, the easier it is to convince them to lend you money..
2. Insufficient Security
We mentioned this above as one of the key constraints that SMEs have. Banks operate under strict regulations and are required to hold collateral for any money that they lend out. This is dictated to them by the governing authorities. If you aren’t able to provide the necessary security for the funds you borrow, their hands are tied. This is probably the most common reason that SMEs struggle to get financed. Most businesses don’t have enough assets on their books that can serve as the necessary collateral. Especially in our 2021 landscape where more and more is happening digitally, and we aren’t keeping as many physical assets on our books.
3. Excessive Debt
In the wake of the COVID-19 pandemic, banks have been issuing more debt than ever before. With so many companies struggling, the number of loan applications has escalated, with limited money. This means that the market is saturated and more competitive than ever. Naturally this makes it more difficult for SMEs to win out over more established companies. You have to continue meeting the ever-rising requirements of the banks or you will miss out.
4. Unproven Industry
If you’re in an industry that hasn’t been around for a long time, banks will remain skeptical. They want to lend to companies that have a proven path to success. New innovations are risky from their perspective, and that makes them less likely to lend to you, even if it is on the cutting-edge. Banks aren’t in a position to take risks like a venture capital firm might. They want to invest in something that is proven to work and has stable forecasts. Often, SMEs in this situation will be forced to turn to alternative SME financing.
5. No Track Record
In the early days of your business you might not have a trading track record of any substance. This is a problem. Banks aren’t sure whether or not they can trust you to make the necessary repayments. They don’t have any proof that you can operate your business successfully. Even though this is a chicken-and-egg situation, banks simply won’t approve a loan when there is a short or non-existing trading history. They want to lend to companies that they know have a stable future.
6. Long Route to Monetization
Many SMEs in the modern day focus on growth first before monetization. This makes it difficult for banks to lend because they can’t get their heads around where your revenue will come from. Banks are much more comfortable with the old-school business models where you focused on revenue first. A business that has a solid business model from the start is much more investable. But if you’re following the modern example of scale first, before monetization, you’re going to struggle to convince the banks.
7. Weak Economy
In the wake of the COVID-19 pandemic, the economy is struggling to recover. Banks assume most of this risk and so it’s always more difficult to raise funds in weak economic environments. Requirements get tightened and money is harder to come by, at least through traditional means. These cycles often take a long time to turn around and as an SME you might not be able to wait for the macro-economic situation to recover.
8. High-risk industry
There are certain industries that banks consider more risky than others. And just by being associated with these makes it harder to get funded. It’s got nothing to do with you, but just the nature of the business that you’re in. These will differ from bank to bank, depending on their context. And it all comes down to their risk mandate. If you’re in this situation, it’s likely that you’ll need to turn to alternative funding sources.
9. No Route to Growth
In order for a bank to fund you, it’s crucial that you can show a path towards growth. Banks don’t fund new innovations or emerging markets. They want to see a solid path where the industry is growing, and your company can scale up accordingly. This gives them the comfort to know that you’ll be able to repay the loan and remain a long-term customer. If you can’t prove this potential, then you won’t be able to access the sorts of funding you’re looking for.
10. Poor Management
At the end of the day, it’s all about the people. Banks want to make sure that the management team in place is capable and competent. They also want to see that they have the necessary skin in the game to succeed. You need a strong, diversified team that has the skills and experience to execute on the stated plan. Without this, you won’t be able to build the trust you need to get the loan approved.
These ten reasons are standing in the way your bank funding. The truth is that, often some of these are insurmountable at this stage of your development. And that’s where you need to think about turning to alternative SME money options. When banks turn you away, it opens up a whole new world of unsecured business loans, cash flow finance, alternative capital, and alternative lending. These solutions are the saviour of many a company who needs the support to get to the next level.
Alternative SME Money for small business growth
A 2018 survey by OnDeck Australia showed that 55% of business owners have been rejected financing by their bank. That’s a huge number, and it represents a real problem for small business. It also represents an opportunity for growth in alternative SME money. In fact, 33% of SME’s indicate that they plan to seek out alternative capital sources to help their businesses grow. In contrast, only 30% feel that their options to do so have Improved over the past five years.
That’s a hungry market, and it’s exactly who Accrutus Capital is here to serve. Accrutus Capital helps out when the banks can’t, because providing small businesses with assistance to fund growth is crucial.
Were available when your business is facing financing challenges due to past bad credit, insufficient trading history, or high-risk conditions.
Looking to fund your cash flow?
Alternative SME Loans to $1 million
- Choose your working capital solutions
- Unsecured and secured options
- Tailored facilities from $10K to $1 million
- All industries with ABN from 12 months
- Good credit score minimum 500
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