Rejected for a bank loan? Here’s how to move forward

When it comes to acquiring finance to launch a small business or cover expansion costs, a bank loan has traditionally been a popular option. But they aren’t always easy to obtain.

Recent research suggests that Australia’s small businesses would borrow as much as $80 billion over the next 12 months - if they could get the funding approved.

Instead, many small businesses are being turned down for a bank loan because they’re unable to satisfy the bank that they’re a worthwhile risk.

The problem is that banks usually want collateral against the loan, such as a family home. This isn’t feasible for the growing number of online business owners, who may not own real estate to offset the loan.
Ian Boyd, Financial Industry Director at Xero Australia says: “Small businesses are the engine room of the Australian economy, and most have clear aspirations for growth; however, the fact is that access to capital continues to be an issue for many.”

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Moving past rejection

Being rejected for a loan by a bank isn’t the end of the world – and is something many small business owners have faced.

Sarah Cichy quit her job in PR to launch her own boutique PR agency, Piccolo PR four and a half years ago. She was rejected for a bank loan, forcing her to take a more sustainable approach to growing her business.

“Whilst I had a strong business plan, I had little capital. I told the bank that the credit was to launch a new business, however, in hindsight it probably wasn’t the best idea as it’s difficult for a startup to get funding.

Cichy also admits she had poor management of records. “My administration was unfavourable as I had insufficient collateral and poor track records of my finance history. I also had a mortgage and cash flow was inconsistent. I was considered a risk.”

Being rejected forced Cichy to prioritise her business expenses to get started, but only made her more determined to succeed.

Things to consider when applying for a loan:

Credit history – You will need a good credit history. Even businesses that pay their bills on time can be rejected for a business loan if the business owner has poor credit history.

Keep careful documents – Proving cash flow and business plans to the banks is paramount, so it’s important to have your finances organised from the outset.

You’ll need collateral – Don’t be tempted to attach a higher value to potential collateral than the bank is willing to accept. This is a common mistake and can be a sign that applications don’t have enough resources to secure a loan for the desired amount.

Have a track record – New businesses with no past financial history or credentials can face significant hurdles.

High debt levels – If you already have ongoing debt obligations, it can indicate issues handling money, which can raise a red flag.

It’s important to understand the reason for the knock-back, says The Bank Doctor Neil Slonim.

“The best thing you can do is probe find out the reason for the original rejection. Be open with the bank and don’t take any feedback personally. This will give you a better idea of what you need to do to get an approval,” Slonim says.

Don’t forget that being rejected for a loan by a bank isn’t the end of the world – and is something many small business owners have faced

The founder of Australia’s first online beauty store, Adore Beauty admits the banks wouldn’t approve her loan application. So, Kate Morris borrowed $12,000 and bootstrapped the website build. That was 15 years ago; today the Melburnian has gone on to be named a Telstra Young Businesswoman of the Year (Victoria) and has a thriving online store selling more than 8,000 products.

Morris advises other small business owners to believe in what you’re doing and push forward despite rejections. “Try to fish for more information to understand why they’re saying no. Usually its timing, branding, nerves or perhaps they’ve got a manager standing in their way. The key is listening.”

Disclaimer: This article is not intended to provide individual financial advice, and is general in nature. Please see a financial advisor for specific advice about your individual situation.

Actionable steps

A bank load doesn’t have to spell the end of your business aspirations. Here’s what you can do next:

Feedback: Ask your bank for feedback and try and understand exactly why you’ve been knocked back.

Rework: There could be an opportunity to re-work your application to include additional detail such as a business plan or financial forecasts.

Seek advice: If you have a business mentor, turn to them and ask for advice on where you could seek funding given the banks have knocked you back.

Alternatives: There are plenty of alternative lenders entering the market, so take a look at alternatives. Be sure to read the fine print – some interest rates are far higher than the banks.

This advice is of a general nature and must not be relied on in place of professional advice. Please speak to your finance professional.