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One In Five Companies Refused Bank Loans Left In The Dark Over Why Their Application Has Been Rejected
08/03/2010
By Bob Northgate
Small firms cite securing bank lending as their biggest growth challenge this year.
One in five small and medium sized businesses who have been refused funding do not know why their bank rejected their loan application, according to research carried out by commercial credit reference agency Graydon UK and business support organisation the Forum of Private Business (FPB).
According to the research 21 per cent of businesses who have been refused bank funding in the past six months were not offered a reason from their bank as to why their application had failed.
Martin Williams, Managing Director of Graydon UK, comments: “It is vital that business owners and managers enter into a conversation with their bank in order to find out where their perceived business challenges lie. This will allow them to address these issues in future applications, considerably improving their chances of securing funding.
“By seeking an explanation from the bank as to why their application was refused, small and medium enterprises (SME) owners may find their bank can actually help, through assisting in the development of a more robust business plan or providing intelligence into why they are already at the limit of their lending capacity for their specific region or industry sector.”
Phil Orford, Chief Executive at the Forum of Private Business says: “Business owners are rightly expected to present proper financial information and management accounts in order to boost their credit ratings so it is fair that lenders also communicate effectively and provide detailed reasons when finance applications are refused.
According to the research, the most common reason given by banks for refusing loan applications during the second half of 2009 was because of insufficient security, with 41 per cent of applications rejected for this reason. Twenty-eight per cent were rejected because the business sector was deemed too high risk and 27 per cent were refused a loan on the basis of their
credit score.
Despite the fact that over a quarter of these businesses failed to secure credit as a direct result of their credit score, the research revealed that 22 per cent of businesses do not know what their credit rating is and less than half (44 per cent) know how to influence their credit rating.
Martin Williams explains: “This research underlines the vital role a good credit score plays in helping businesses to secure funding. It takes time to build up a good credit rating and so businesses need to plan ahead and think about how they intend to fund their business over the coming year, and what they can do to build up their credit rating.
“The credit referencing industry is increasingly providing information to businesses on how they can improve their credit score. Businesses who take this advice on board are likely to find it easier to secure funding despite tough lending conditions continuing through 2010.”
The research also reveals that small and medium business owners believe that a lack of available bank finance will prove to be the greatest obstacle facing their business during the remainder of 2010.
Almost a fifth (19 per cent) of businesses believe that access to finance will be the biggest hurdle they will come up against this year. This is compared to 11 per cent who believe that the weak financial performance of their business will be their biggest challenge over the next 12 months.
Martin Williams says: “The fear for business owners is that the funding problems facing SMEs will continue to go unresolved throughout 2010, leaving businesses starved of funding for another year. Recent reports that the Royal Bank of Scotland is lobbying the Government to lower its business lending targets have done nothing to allay these fears.”
Phil Orford, Chief Executive at the Forum of Private Business concludes: “The Forum of Private Business has evolved to provide tailored solutions to real business problems and it is important that lenders are also prepared to change. We have entered a new business landscape where a more collaborative approach between businesses and banks is required if the future of enterprise and the economy is to be a healthy one.
“Securing finance is the main priority of the vast majority of small businesses. Economic conditions remain extremely tough and, even when the economy does recover substantially, growth finance will be important to allow them to keep up with demand.”
Graydon UK and the FPB questioned over 750 businesses on their expectations for the next 12 months, as well as their experiences in securing funding and credit management during the latter half of 2009.
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