How to get business finance when the bank refuses you

How to get business finance when the bank refuses you

The 60 second read

Short of time? The next few paragraphs are all you need to read if you can’t spare the time to read the whole blog.

Annoying and frustrating as this will be, it is one of these hurdles that most successful business people will come across and, with perfect hindsight, enjoy jumping over. In fact, it’s right up there with people not believing your idea or start-up is any good, people not having any faith in you as an entrepreneur, and people telling you all the reasons why it won’t work.

Given that, the best way to go about fixing your issue when or if your business loan is declined is to acknowledge that it’s a good learning experience. Then go back, do your homework, or check your homework, and improve your position so you can go elsewhere or back to the investor with an offer they can’t refuse.

The rest of this blog gives you some ideas and a process to do that. It includes:

  1. Do a little audit of why your business loan was declined, either with the bank or with an accountant.
  2. Don’t rush back to that bank – you just may not meet one of their criteria. This is the most common reason our clients get initially rejected, even though they have very, very persuasive financial statements and a business plan. But because they do, they often get accepted the second time – just by another bank or institution.
  3. Get professional advice – just in case you didn’t put yourself in the best light, even though you may have a great business idea.
  4. Be flexible in your ambitions. It may be that the bank has a point and this time you haven’t put your best version of the business forward. If you go away and think about how you could do part of your idea, or a minimum viable proposition, you may tap into a richer idea that ultimately you are happier with, especially if it’s lower risk to you.

Audit of why your business loan was declined

There are several reasons your business loan could have been declined:

  1. The bank has some kind of minimum turnover requirement and you were just not quite ready in year one with your revenue forecast to hit that.
  2. You may not have enough experience, either in business, managerial or similar,that makes the bank think you personally could get them their money back over time.
  3. Your credit score is too low – watch out though, they all have different scores so you may be too low in one and fine in another lender’s eyes.
  4. They’ve got a downer on your business – you may have seen a fantastic opportunity for a new type of sandwich shop, or a huge growth in your local market with a big gap for cosmetology but they might be on the banks hit list and just too risky.
  5. You’ve decided not to put up any collateral – if it’s a secured business loan, they will want something of yours to act as collateral.
  6. Not enough cash flow – easily fixed if you go and get an expert to work on your numbers for you.
  7. You haven’t correctly established your start-up costs, ongoing costs, and expenses versus your revenue and so you’re not asking for enough money. The solution to this is go get that expert again and work it out with him or her.
  8. Debt utilisation – lenders maybe want you to be using no more than 30% of the total credit available to you. They’re worried that you are over extending yourself.
  9. Your paperwork, business plan or financial statements just aren’t complete; or they are, but you’re not comfortable or familiar enough with them and the bank catches you out on a technicality.

Alternative forms of funding

The good news for you is that this is a very competitive industry and there are lots of people who would like to lend you money. So, once you’ve got your bugs or any other issues ironed out from the above long list of areas where you may have gone wrong, it’s really important for you to shop around.

There’s nothing wrong with looking for a better, lower interest rate, or a longer term. If you do decide to opt out of the bank loan scene altogether, here are some of the other things to look at:

  • Cash advance for a business that has specific cash needs such as a recruitment agency or a buy now, pay later start up
  • Government grants
  • Equipment or car financing such as leasing or contract hire/purchase
  • Debt consolidation
  • A line of credit based on your home equity
  • A personal loan
  • A business line of credit
  • A business term loan
  • Commercial mortgage

Work with an expert

These people are really helpful when you’re just starting out. This is because they can help you compare features, benefits and costs of traditional and alternative business loan providers.

Even now, there are  online companies that can devise options for you by getting you to fill out an online application, and provide essential information about your business.

Be flexible in your ambitions

Get your books and reports in the best possible light. A lot of small business owners think the graphic design, colours, photographs, and ‘professional’ formatting will help them persuade the lending manager. In reality, he or she will go straight to the financial tables that you provide.

In these tables, they have benchmarks, ratios, and lists of numbers and targets that you need to have or hit.

Therefore, the first step is to have all of these – and this is where having a professional, or a professional process that you follow yourself slavishly, can help.

The next step is to make sure that you really understand your finances. If you cannot explain your three main statements to the bank manager yourself, as well as handle a few queries, or run through your assumptions with your bank lending manager, then you will almost certainly stumble. You may have a great business plan and a great set of financials, but your inability to explain them will trigger one of the other red flags for the bank above – that you don’t quite have the right skillset or experience … yet.

The following three statements are what you need to be able to explain:

  • Your profit and loss. Therefore, you need to understand the costs, expenses, and sales revenue that makes up a profit and loss. While you’re doing that, you need to be able to talk about all the assumptions that are inevitable about how much things will cost, when you will need to buy them, and how much money might come in, when and how you will get that money to come in.
  • Balance sheet. Put simply, this is just a list of all the stuff you have that could count as money or similar to money (like a car or a property), and all the stuff that you owe now,in the future, or in the past. For example, this could include your BAS, or some debt on your car or computer.
  • Cash flow forecast. This will help you understand, even if you are doing well and you have lots of money, whether you will run out of money at a particular time. An example would be if you had a quiet patch over Christmas and you had no revenue coming in so you had to spend all of the cash that you had at hand. Another example would be four times a year when you have to pay all your tax and your pay as you go withholding.

If you’ve recently had an application for a business loan declined and would like assistance in moving forward, contact us on 1300 644853 or at info@smallbusinessplans.com.au (24/7 website chat and enquiry available).

Need help?