Why SMEs Struggle to get a Business Loan from the Bank
Business loans have always been the traditional means of securing funding for SMEs, but in recent years banks are lending less than ever to SME business owners. Some have found it impossible to get funding which leads to a lack of growth through being unable to hire new staff, invest in new technology or buy new premises. In some cases, businesses have had to close down all together due to a lack of funding. So why is it so difficult? In this blog we will explore the reasons and potential barriers between you and your bank loan.
Rigid Lending Criteria
Banks have always lacked flexibility when it comes to how they lend money and have also been rather archaic in how they view smaller businesses and their financial needs. They have certain criteria, set in stone since the economic crash almost a decade ago, that forms an essential ‘check list’. If you don’t fit into that then there is no flexibility unless you are prepared to put personal assets such as your house as security against the loan.
Part of this criteria is that the amount borrowed needs to make business sense to the bank in terms of how much they will make as a return on your loan. This means that they’re only really willing to lend large amounts where the mark up is substantial. Many smaller businesses don’t need a large loan, which means that a bank will be unwilling to lend to them.
The Risk Factor
As cautious as their lending practice is, banks will do whatever they can to ensure that a loan is safe and if they consider you to be too risky then the answer will be a flat ‘no’. They need to ensure that you will have the monthly cash flow to be able to make loan repayments on top of payroll, inventory and other business overheads.
Assets and Security
Banks want applicants to have plenty of collateral to offer as security to a loan, so if you can’t put up business or personal assets or find a suitable guarantor, you may have difficulty getting the loan you want.
Lack of Preparation
Preparing your cash flow statements, accounts and projections for the bank can help assure them that you will be able to make your payments reliably, but even that isn’t enough. Banks want to see that they are investing in a business that has a future they can rely on. As a result, having a business plan is essential when applying for a bank loan. Without one, you can’t demonstrate how you’re going to use the money you borrow or how you’re going to return it with interest.
Having healthy credit can make it much easier to get a loan. It’s often the very first thing that banks and other lenders will look at when considering your loan application. First-time or new business owners may not have much of a credit history, which can mean a rejected application. A good credit score shows that you can manage personal and business finances and, most importantly, that you are able to stay consistent with your credit agreements. A history of missed payments, defaulting on loans, or bankruptcy can have a major impact on what loans you can apply for, so investing time and energy in credit repair may be necessary.
Staff and Customers
Not only do you need the right kind of financial history, you also need the right people. There are three groups of people that a bank will prioritise when they are assessing your business for a loan application. The first is you, the business owner, if you don’t have at least a year of experience within the industry of the business you want to fund, that can be a major barrier. Managers are the second, as banks will be hesitant to lend to businesses without an experienced management team. Lastly, you have to prove that you have a customer base that can support the business. It can be hard to prove this but good market research and strong prospective customers or existing clients can help.
The Application Process
Many business owners may struggle with the loan application process itself, as it can be archaic, convoluted and, most of all, time-consuming. They can be up to 8 pages long, as well as requesting up to 12 supporting documents, including accounts, legal papers, guarantors, and more. That paperwork alone can be daunting to a new business owner.
Alternative Forms of Funding
SME owners are falling through the cracks of the current lending system with banks. But if this is the case for you, don’t give up hope yet. There are a variety of alternative types of funding for businesses where you don’t necessarily have to have trading history or assets to offset against the loan. If this sounds of interest to you then call one of our team at BFS so we can help and advise you on options to suit your situation on 0800 047 2389.