Business funding options if you have been refused credit
In this article, we will discuss why you may have been refused business funding and your next steps.
Applying for business finance
Business owners require funding for many reasons: stock, equipment, expansion, staff wage or perhaps to alleviate cash flow problems. When you’re applying for business loans, it all depends on your ability to pay back debts due and the lender’s confidence. For businesses who have previous trading accounts detailing past revenue and their sales forecasts, it is, generally, less of a challenge to acquire sources of business finance. However, lenders may still deny your business loan if there appears to be a going concern risk.
Startup businesses face more of an uphill struggle to gain funding, but that doesn’t mean you will ultimately be refused. To provide working capital for your business, lenders require a financial background and good credit score. Without those two factors, it’s difficult to ascertain whether your enterprise is/will be successful. Similarly, directors looking for business startup finance may not have the experience to produce a credible bank loan application. Typically, larger companies will boast dedicated team members for business funding, with the records and experience to create a detailed bank loan application that will likely be approved.
Why have I been refused?
There are a plethora of reasons why your business might have been refused funding. Here we share some of the most common areas of concern and the alternative business finance options that might be available.
This issue refers to established companies. Lenders will look to your previous accounts and analyse your financial background. They will likely refuse business funding if you present a risk due to past defaults. If your company has been issued a county court judgement (CCJ) or has been served a statutory demand, you may be refused. Alternatively, if you have not provided enough detail on your trade history, the information may not be enough to agree to your business loan application.
Often, a lender will look for security for their business loan in the form of personal guarantees. A personal guarantee refers to the director, or owner, taking responsibility for the business funding, should the company be unable to pay their debts due. The ‘guarantors’ will be held personally liable for the repayment of the debt, along with any additional charges including interest. A lender is more than likely to agree to your business funding request if the business loan is secured, which could prove more difficult for small business financing.
Lack of previous trading history
The primary issue for small business support is the lack of trading history. Most lenders would like to see a healthy track record, as well as experience and revenues in your particular industry. As a general rule of thumb, a lender would look for at least a year in business, which could mean crowdfunding could then be a business finance option. However, if you happen to have a good credit score, with other factors in place, it’s likely a startup business loan will be approved.
Without the previous trading history, lenders may feel you are unable to meet payment deadlines or regular repayments, which could result in a red flag for your business finance.
Bad personal credit score
If you are applying for business startup finance, a bad personal credit score could mean bad news for your application. In particular, small business financing requires a good personal credit score from directors, with the exception of large-scale corporations. You can check your personal credit score through a number of channels. However, if you happen to have a bad score, there are a number of tasks you can undertake to improve.
Poor bank loan application
As we mentioned above, a poor bank loan application could result in refusal. Established businesses likely have financial directors producing the application, with previous knowledge and experience to hand. Unfortunately, many SMEs do not have such detailed knowledge to create their bank loan application effectively, thus losing potential small business financing. If this is the case, we recommend seeking advice as from industry peers with experience of making successful applications as early as possible in the application process. This can only aid when looking for business startup financing.
Why is my startup business high risk?
In the UK, in 2017, over 660,000 new companies were established. In terms of funding, previously business startup finance has been seen as high risk, with an estimated four in ten closing within three years of opening. Whilst there are more financing options becoming increasingly available, common factors that can affect the ability to obtain funding are:
- Inadequate analysis of the market: A successful startup requires extensive preparation, researching your market, peak periods and competitors. Any gaps in your research which show in an application can lead to refusal.
- Lack of financial help: Many owners of SMEs attempt to do it all themselves in the first several months, which can make it easier to fall back on repayments and not meet deadlines.
- Borrowing too much: You should have a clear idea of budget and sales forecast, and not overestimate the amount you need for business funding. It may be tempting, but you will have increased debt obligations should you borrow too much.
- Lack of experience: Starting a new business can be complex and certainly stressful, particularly with financial obligations. If you do not have the experience in the market, it is often perceived that there’s a higher chance of making mistakes and failing to meet debts.
What can I do next?
You should certainly not lose all hope if your business finance is rejected, as there are many options for business help. The best solution will depend on your company history, timeframes and amount required.
Crowdfunding has become popular in recent years, due to the likes of Kickstarter and Crowdfunder. This source of business funding refers to small amounts of investments from a large number of investors. Typically, to prove successful, you must provide a unique pitch and demonstrate extensive research into your particular market, with ideas for long-term expansion.
Similar to crowdfunding, peer-to-peer funding provides the opportunity to connect your business with individual and corporate investors. This is, generally, interest-based lending and can usually offer much better rates on return.
You may have a poor cash flow, however if you have company assets, you may be able to free up cash with the refinancing of those particular assets.
Invoice financing may be suitable should you have your business loan rejected. Lending is organised against the amounts raised on your invoices. This may not be suitable for every type of business, you can read more on the subject of invoice finance here.
There are several other options for business funding we have touched on in our extensive guide. If you’re struggling with finance and require advice, you can contact our team at Business Rescue Expert to discuss your next steps.