Securing a bank loan: Improve your chances of getting a 'yes'

One of the prime reasons supplied by banks for turning down business loan applications is a lack of preparation or evidence of creditworthiness from the business owners sitting in front of them.

While there are undoubtedly firms out there with viable business models who have done everything right and still walked away empty-handed, as Lord Sugar and Smarta editor Matt Thomas would argue, many business owners let themselves down by showing up woefully underprepared, unable to back up their assumptions on sales and profit with any meaningful data, or demonstrate how they will be able to repay the debt.

On the one hand, banks are frequently bashed for not lending, but on the other, they were slammed for irresponsible lending in the first place and are now more risk-averse as a result.

Whatever your stance on the bank lending debate, the key point for small firms is to avoid the pitfalls that make it easy for lenders to turn you down. Proper financial management information is essential, including forecasts which factor in loan repayments - lenders want to know when and how they're going to get their money back.

Small business lobby group the Forum of Private Business said it has spotted a growing trend of banks moving away from security-backed lending towards regular analysis of businesses' abilities to meet their liabilities, and firms need to be more proactive about proving their creditworthiness.

As a result, the FPB is now offering financial management service Creditpal free of charge to all its members. CreditPal enables firms to upload their financial information, automatically prepare and present profit and loss balance sheets and two-year credit histories in the format banks require - minimising the risk of loan applications being rejected.

CreditPal was launched by data analytics firm Future Route in partnership with credit referencing agency Graydon UK, and was designed to enable small firms to submit up-to-date management account information to lenders (which is also validated) in order to obtain a more accurate credit rating.

According to Graydon, when it comes to small businesses and start-ups, credit agencies face a dearth of information on which to base their credit scores, which ultimately affects lending decisions: in the credit-checking world, a lack of information can be just as damaging as a history of defaults. The information they do have to go on, much of which is historical data from Companies House, can be up to 22 months old.

At the same time, small businesses aren't doing themselves any favours with the information they supply to lenders themselves. "Leading banks have repeatedly told the Forum that information submitted by SMEs is often unclear and confusing, making it difficult for them to properly assess lending risks on a case-by-case basis," the FPB said.

The general dearth of information on which to base lending decisions has led to many firms complaining that they have been turned down for loans purely based on their size, or because their sector has been dubbed a 'no-go area'.

Phil Orford, FPB chief executive, said: "Lenders simply must review their risk criteria and be less punitive by refraining from assessing viability purely based on a firm's size or sector.

"Banks must now back business owners' efforts to proactively establish their creditworthiness by providing reliable, up-to-date financial information, which is what lenders have been calling for. It is time for businesses to put their banks to the test."

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