According to the Australian Bureau of Statistics, 96% of Australian businesses are classed as small businesses. However, because small businesses are considered a higher risk than their medium and large counterparts, small business owners often have more trouble securing a loan.
So, if you’ve recently had your loan rejected by the bank; you’re not alone!
However, that’s not to say that securing finance for your new business, or your business expansion is impossible. To help you work out where you’ve gone wrong, we’ve put together five of the most common reasons small business loans get rejected.
Bad Credit or No Credit
Bad credit or no credit history is one of the most common reasons loan applications get rejected.
Did you know that the bank doesn’t just look at your business credit score? They also look at your personal credit ranking.
Your credit score can be low for a number of reasons, including:
- You’ve claimed bankruptcy at some point in your life, or someone else on the loan application has
- There have been a number of late or missed payments to vendors, credit card issuers or lenders
- Your business is only new and you don’t have an established credit history yet
To raise your personal and business credit score, make payments on time, spend well under your credit limit and keep your credit accounts open.
Low Cash Flow
A bank will only approve a business loan application if they can see that your business has enough money to make the monthly loan payments, while still paying the rent, payroll, inventory and any other expenses related to your business.
This is usually problematic for businesses, especially small ones, as owners usually struggle to keep extra money in the bank, while still meeting all of their other financial obligations. One of the biggest reasons for this is that most companies have to pay for their inventory upfront before they have a chance to make any money off it.
To ensure any of your future loan applications get approved, make sure you keep track of your how much money is flowing through from operations. If more money is going out than what’s coming in, you might have to make some cutbacks.
Do you have physical business property that you can put up as collateral for the bank? If for any reason you can’t make your repayments, the bank will seize any physical property you have to make up for the money that’s owed. If you don’t have any collateral when you apply for your loan, the banks are more likely to reject your application.
You could offer up your personal assets (home, cars, and etc.), but most business owners aren’t willing to put their families financial security at risk to get their loan approved. Especially since a large number of small business operators in Australia are living off minimal wages, to begin with:
|Typical Gross Weekly Income of Small Business Operators in Australia|
|Negative or Nil income||1.5%|
|$1 to $149||3.0%|
|$150 to $249||5.2%|
|$250 to $399||11.2%|
|$400 to $599||19.2%|
|$600 to $799||15.2%|
|$800 to $999||12.4%|
|$1000 to $1299||12.4%|
|$1300 to $1599||6.8%|
|$1600 to $1999||4.2%|
|$2000 or more||8.8%|
* Data Source: ABS Cat. No. 8175.0
The above table indicates the financial pressure placed on small business owners at home, as well as in their professional lives, which makes offering up personal collateral very difficult.
If you’re applying for a small business loan and don’t have any collateral, talk to the team at Complete Financial Services today!
Do you have a good cash flow, a great credit ranking and a decent amount of business collateral but still had your loan rejected?
This could be because your industry was considered a high-risk one at the time of your application. For instance, you’re running a food delivery service, but when you applied for the loan the country was going through rising food or fuel costs. Suddenly, the banks are looking at your financial position and your business plan wondering; if prices continue to rise, will they be able to keep up?
This is just one example of how external forces can affect business loan approvals in Perth, and the country.
To try and tackle this issue, make sure you keep-up-to-date with industry changes, time your loan application carefully, and if necessary adjust your business plan to accommodate any economic changes.
Lack of Preparation
A lot of small business owners struggle to understand the loan application process, which is perfectly normal. If you’re not sure what the best approach is, talk to a business loan broker in Perth, such as Complete Financial Services. We can guide you through the process and ensure your application is lodged in a way that gives you your best chances of approval.