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Why Finance Applications Get Declined & How to Avoid Rejection

Ever been declined for a business loan?

It happens more often than you might think. According to a study carried out a couple of years ago by the British Bankers' Association, over a 2.5-year period, high street banks turned away 49% of small business loan and overdraft applications.
 
With nearly two decades in the finance industry, I've reviewed countless finance applications. Today, I want to shed light on the top reasons businesses and individuals face rejection when applying for finance.
 
Understanding these factors can help you navigate the application process more effectively and increase your chances of securing the funding you need. Here are the 4 areas I think you should be paying extra attention to...

1. Missed or Bounced Payments

Overdue Invoice

Missed or bounced payments are a major red flag for lenders. Whether it's due to poor cash flow management or overextending financially, funders see this as a sign of financial instability. Consistently missing payments indicates a lack of reliability in meeting financial obligations, which can lead to immediate rejection.
 
How to Avoid This:

  • Ensure you have a solid cash flow management system in place.
  • Avoid taking on more debt than you can handle.
  • Set up reminders or automatic payments to ensure all payments are made on time.

Recently Asked Question:

Can lenders see if I've missed payments with suppliers?

Lenders typically cannot directly see missed payments to suppliers on your credit report. However, they may become aware of such issues through various means:

- Trade credit reports: Some credit reference agencies in the UK, like Creditsafe or Experian, offer trade credit reports. These may include information about your payment history with suppliers if those suppliers report to the agency.
- County Court Judgments (CCJs): If a supplier takes legal action due to unpaid invoices, this could result in a CCJ, which would appear on your credit report.
- Financial statements: When reviewing your accounts, lenders may notice discrepancies or unusual patterns in accounts payable that could indicate supplier payment issues.
- Bank statements: If you're required to provide bank statements, lenders might spot bounced payments or consistent late payments to suppliers.
- Industry reputation: In some sectors, word can spread about businesses that consistently pay late.

To maintain a strong financial profile, it's crucial to manage supplier relationships effectively and pay invoices on time. If you're experiencing cash flow issues, communicate proactively with suppliers to arrange payment plans. This can help prevent escalation to legal action or negative reporting.

Remember, while missed supplier payments might not directly appear on your credit report, they can indirectly impact your ability to secure finance by affecting your overall financial health and business reputation.

 

2. Affordability Issues

Affordability is another critical factor. For individuals, this often translates to a high utilisation score, meaning too much debt compared to available credit. In business finance, it boils down to the financials not aligning with the loan request.

 

How to Avoid This:

  • For individuals: Maintain a low credit utilisation ratio by not maxing out your credit limits.
  • For businesses: Ensure your financial statements accurately reflect your ability to repay the loan. This includes having a healthy balance sheet and consistent revenue streams.

 

Recently Asked Question:

How do I know if my UK business has a good credit score?

Understanding your UK business credit score is crucial for securing finance and managing your company's financial health. Here's how to determine if your limited company has a good credit score:

- Check your business credit report: Obtain reports from major UK credit reference agencies like Experian, Equifax, or Creditsafe. These typically offer free trials or one-off reports.
- Compare to industry averages: Your score's meaning can vary by sector. Some UK credit agencies provide industry benchmarks for comparison.
- Review regularly: Monitor your score quarterly, as it can change based on your financial activities.
- Look for red flags: Check for any CCJs (County Court Judgments), late payments, or high credit utilisation that might be lowering your score.
- Consider director scores: For SMEs, lenders often consider personal credit scores of directors alongside the business score.
- Use credit improvement tools: Some UK credit agencies offer services to help improve and monitor your business credit score.

Remember, a good credit score can help your limited company secure better finance terms and rates. If your score needs improvement, focus on timely payments, reducing credit utilisation, and maintaining accurate Companies House records.

By regularly monitoring and understanding your UK business credit score, you'll be better positioned to make informed financial decisions and improve your chances of securing favourable business finance options.

 

3. Lack of Strong Asset Security

Modern Audi car with key

In business finance, having strong asset security can sometimes offset challenges related to missed payments or affordability. Lenders are more willing to extend credit if they see that you have valuable assets to secure the loan. This is particularly true in asset finance, if the asset generates income, thereby boosting your turnover and demonstrating your ability to repay the loan.

 

How to Leverage This:

  • Present strong collateral when applying for a loan.
  • Highlight any income-generating assets in your application to show your financial stability and repayment capability.

 

Recently Asked Question:

What business assets can I finance?

Asset finance can be a great way to acquire equipment or leverage existing assets for your UK business. Here's what you can typically finance:

Hard Assets:

Vehicles: Cars, vans, trucks, and HGVs for your company fleet
Machinery: Manufacturing equipment, CNC machines, or industrial ovens
Construction equipment: Excavators, cranes, or generators
Agricultural machinery: Tractors, harvesters, or irrigation systems

These hard assets often get you better rates and more flexible terms because they hold their value well.

Soft Assets:

Technology: Computers, servers, or phone systems
Office equipment: Furniture, printers, or air conditioning units
Catering equipment: Ovens, refrigerators, or dishwashers
Renewable energy tech: Solar panels or wind turbines

Soft assets might depreciate faster, but many lenders still offer good options for financing them.

Specialised Equipment:

- Medical devices
- Printing presses
- Hospitality equipment
- Specialist tools for your trade

The classification of assets can vary between lenders. Some might see certain tech as a hard asset if it keeps its value well. You can also refinance assets you already own, which can free up cash for other parts of your business.

Don't worry too much about the age of your assets. Some lenders specialise in older equipment, especially if it's still got a long working life ahead. For the best deal, try talking to a finance broker who knows your industry. They can help you find the right lender for your specific needs and potentially save you money.

Remember, using asset finance can have tax benefits and help you keep more cash in your business, which is always handy for unexpected expenses or opportunities.

 

4. Business Model Inflexibility and High-Risk Sectors

Lenders also look at the flexibility of your business model and the sector you operate in. Businesses in high-risk sectors or those with rigid models are seen as more vulnerable during economic uncertainties. Showing your ability to pivot and adapt can mitigate these risks.

 

How to Mitigate These Risks:

  • Develop a business model that allows for adaptability and flexibility.
  • Highlight how your business has successfully pivoted or adapted to changes in the past.
  • Implement and showcase contingency plans that prepare your business for various scenarios.
  • Demonstrate a thorough understanding of the risks associated with your sector and present strategies and your unique proposition to mitigate them.

 

Understanding the reasons that finance applications get declined is the first step toward improving your chances of approval. By managing your cash flow effectively, maintaining affordability, leveraging strong asset security, and having a flexible business model that can adapt to changes, you can present a stronger case to lenders.

 

I hope this gives you a brief glimpse of what to avoid as you plan for your next finance application. If you have any questions or need further assistance, feel free to reach out.

Click Here to Watch Our Short Video On Getting Declined On Finance

Thanks for reading

James


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Useful Resources:

 

YouTube Video:

Understanding Overtrading in Business: Causes, Effects, and Prevention Strategies for UK SMEs

CLICK HERE

 

Learn More About Business Finance:

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Disclaimer: This blog post is intended for informational purposes only and does not constitute financial advice. All information is collated at time of writing and the best efforts have been made to ensure accuracy.  

About the author

James Murray

Meet James, the founder of James Murray Finance. With nearly two decades of industry experience and eight years dedicated to the finance sector, James has worked with a wide range of businesses, from startups to established enterprises. Read More >

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