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Why banks don't lend...and what to do about it

There are a number of reasons why SME's seek access to additional funds. It may be that your business is struggling to fund its growth. Perhaps you want to invest in your skilled workforce and develop training initiatives, expand trade links or develop an innovative product. Whatever the reason, the option to go to a bank isn't always realised.

Funding and investment: the issues for small businesses

The lack of funding opportunities could be down to the SME itself; the owner doesn't want to part with equity or that applying for funding is deemed to be high risk and isn't part of the company's long term strategy. 

Whether the funding issue is internal or external the result could be less growth, a less skilled workforce or fewer new products and services.

So why don't banks lend?

According to Boost Capital the average size of a loan to SME's is £30k. The smaller the loan, the lower the profit for the bank. Small businesses are already at a disadvantage before the application process even begins.

There are other reasons why banks are reticent to lend to small businesses and it's worth getting to grips with them.

  1. SME's typically have low or fluctuations in their annual cashflow. Seasonal business will also impact on cashflow. Banks are known to like a steady flow of income and by definition, SME's are less likely to be in a position to guarantee it.
  2. SME's are unlikely to offer collateral i.e. property and assets to secure a loan. Businesses in the hospitality sector, for example restaurants, are particularly vulnerable.
  3. Banks typically prefer to have lone lender status. It's common for SME's to have multiple loan arrangements in place and this tends to put off a bank when evaluating a potential loan.
  4. Banks will look at the personal credit score of the individual applying for the loan. Not only will it count against you if you have a score lower than 720, but you'll be penalised if you haven't sought credit before. Banks will obviously assess your business's ability to keep up with the repayment schedule and are very very careful in their assessment of that ability.
  5. Very often, banks will ask for a personal guarantee to secure a loan. This is going to be a tall order for a startup, young businesses just trying to keep afloat.
  6. Banks will insist on a business history to create a picture about your solvency. Typically (according to the Business Telegraph) SME's are most likely to apply for additional funding 3 - 6 months after inception. That's hardly a history.
  7. A successful loan application is going to be the result of the bank buying (literally) into your product, service, target audience, the in situ management team and your reputation in the marketplace.

And what can you do about it?

We've pulled together a few pointers for you if you find yourself in the position of applying for a loan.

  1. Firstly - do your homework - look at the financial options out there. 
  2. Look at the bank/fund option that is the best fit to your company's ethos.
  3. Produce a clear business plan. Be specific in your objectives and goals and outline the path to achieve them. 
  4. Consider applying for multiple loans. Make applications to a number of options ideally within a 2 week window. Be careful though - making loan applications over a long period of time will damage your personal credit score.
  5. Get a copy of your personal credit score - rectify any errors and make improvements (do you pay all credit arrangements on time?).


What information will you be asked to provide?

This is not an exhaustive list but be prepared to provide:

  • Personal and business tax returns;
  • Banks statements;
  • Financial business statements;
  • Articles of incorporation;
  • Commercial and franchise agreements.

And the alternatives?

There are different funding options if you're struggling to get support from a bank. Small business loans, merchant cash advances, invoice finance, peer to peer lending and crowd funding are channels to investigate. 

Another option is the British Business Bank, 100% Government funded, independently managed and was established to provide a portal for small businesses to link to potential funding partners. It's aim is to be the "centre of expertise on smaller business finance in the UK." 

The focus is on "start-ups, high growth, or simply viable but underfunded."

Business Angels are independent investors who will fund startups/young businesses using their own wealth. In a report published on behalf of British Business Bank there would appear to be reasons to be positive. In the period April to July this year, 57% of Business Angels had made investments. The infographic below summarises the key findings in the report. A Business Angel is not only in a position to react quickly to calls for financial support and provide you with capital for your business but will act as a mentor. Rather than insisting on a seat on board he or she will be your coach and guide. 

Check out one of our previous blogs on how businesses are valued for a Business Angel.

Need help and advice?

To chat through your options feel free to drop me a line at phil@nbsadvisory.co.uk, or complete the contact form or call +44 7596 537289