Why do lenders say no?

The last time we looked, lenders were agreeing around 88% of the business loan applications that they were seeing. The government backed loan schemes will have helped in 2021, but that's a pretty good success rate, nevertheless.

It still means, though, that 12% are receiving the disappointment of a 'no'.

We thought this would be a good opportunity then to look at the most common reasons for a business loan application to be declined, and to see if there is anything the borrower can do about it.

By far the most common reason at 29% is the sector being deemed too risky, which is pretty unfortunate if you happen to be in one of the prevailing 'red flag' sectors, because there is little you can do to change it other than go into a different business.

Notable red flag sectors in 2021 were, predictably, hospitality and retail. The better news is that attitudes towards these sectors are softening as we move into the later stages of the pandemic, and qualified brokers like the ones on our panel, know which lenders have the best appetite and products for these businesses at any time.

The next most common reason at 25% is the application falling outside of the lender's criteria. Now, this is solvable because it should be very easy to determine what a lender's criteria are before the application is submitted. A knowledgeable broker will be able to steer you in the right direction and save a lot of wasted time and frustration.

Coming down the list, we have the more typical credit reasons, which fall to the opinion and experience of the underwriter:

Poor credit history: 19%

Debt utilisation too high: 8% (lenders call this over gearing)

Lack of strong cashflow: 5%

Insufficient security: 4%

Affordability: 1%

The fundamentals of a business and what it wants to borrow relative to what it can afford and secure are difficult to change. Our panel brokers see many situations where the business owners are being overly ambitious or optimistic in their expectations. When this happens, our brokers see it as their job to explain the situation and, where possible, to reframe the application into something that is going to be acceptable to a lender while still giving the business what it needs.

Please talk to us if you are considering applying for finance, whether it's for a property project, a business acquisition, working capital or anything in between. We can give you the best possible chance of securing the agreement you need.


Source: NACFB Survey of 300 brokers in 2021.

Photo by Priscilla Du Preez on Unsplash

Why do lenders say no?

By: Neil Edwards

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