19/10/2011

By Rob Warlow, business finance author

Talk to most business owners and they will probably share an experience of when their bank said ‘no’ to a request for finance. Perhaps it has happened to you? If so, you are not alone; the media is awash with tales of woe from frustrated entrepreneurs who can’t seem to get the financial assistance they are looking for.

What are the reasons why your bank would refuse your request? Following are 7 of the most common causes:

Not Enough Information
You obviously know your business inside out and it’s easy to fall into the trap of glossing over the basics when explaining your business to a third party. If the bank has declined your request due to lack of information then frankly it’s your fault!

You need to draw up a comprehensive and compelling Business Plan which explains exactly where you’ve come from, where you are now, where you want to be and how you’re going to get there.

No Financial Information or It’s Out of Date
Don’t expect the bank to say ‘yes’ if you haven’t got any financial information, or if you have it’s out of date. Bankers thrive on numbers; they will want to see your Annual Accounts, latest Management Figures and forecast Profit and Loss, Cash Flow and Balance Sheet.

In the current climate, where a lack of understanding of your financial position is dangerous, there is no excuse not to have all these requirements at hand. If you haven’t, then go and speak to an Accountant before you darken your banker’s door.

Your Business Model’s Not Right
In listening and reading about your business maybe something doesn’t add up about your model. It could be that your target market is too broad; you have not clearly identified who your customers are; your production or delivery methods are open to external threats. Whatever it is, there is an aspect of the business which concerns the bank.

In reviewing your business model the bank will be looking the areas which can put your business at risk. The bank will be hunting for the internal and external risks which could damage the way you do business.

In the Business Plan your aim is to clearly identify the potential risks, and more importantly, outline what you have done, or you are in the processing of doing, to reduce or mitigate those risks.

Poor Credit History
Part of the bank’s credit assessment process will involve undertaking a credit search against you and your company. The bank is looking for evidence of unpaid debts, late payments or County Court Judgements, all of which will taint your credit worthiness.

If you know that a credit search will throw up a less than flattering picture then it’s best to tackle the issue head on and explain the circumstances in your Business Plan. A string of credit defaults is going to come out in the open anyway so it’s better that you are in control of how the bank finds out. This will give you the opportunity to provide the background and to outline any mitigating factors.

If you’re not sure what your credit history is like you can obtain a report from any of the major credit reference agencies. It’s worthwhile doing this in case there is a mistake on your file which can happen.

Not Enough Security
In the current risk-averse climate banks want a safety net in case of failure. If your finance request is marginal then the issue of security (or lack of it) could be a deal breaker. What are you able to offer the bank to take the sting out of the tail? If you have nothing to put on the table look at the Enterprise Finance Guarantee Scheme, where the government will guarantee a portion of your debt. Reports suggest that take up of the Scheme is declining so make sure the bank has given this as an option, assuming you are eligible.

You Didn’t Come Across Well
If you are a small or medium sized business you must realise that the bank is lending to you not your business. You are the one will make or break your business and so the bank will be looking at you to assess how well you perform your role. If you show any area of weakness or lack of confidence in your ability to deliver then the bank will turn you down.

To come across as a good risk, rehearse your pitch, know your Business Plan and financials, acknowledge the inherent risks and explain what you are doing about them.

The Bank Doesn’t ‘Get It’
If your business is a complex beast or you are in a highly specialised market it’s possible that the Bank Manager you’re dealing with just doesn’t ‘get’ what you do. If you sense the person you are dealing with doesn’t connect with you or your business then walk away and find a bank that can. Seek out the specialists who will see beyond the jargon and can understand the potential opportunity.

Being turned down by the bank can be frustrating and downright annoying but, by reflecting on these seven common reasons, you will increase your chances of getting that elusive ‘yes’.

Rob Warlow helps business owner’s deal with their banks to obtain funding or to assist in re-building damaged client-banker relationships. He is the author of ‘Loan Sharp: Get the Business Finance You Deserve’ which is available on Amazon or via his website, www.businessloanservices.co.uk