Common reasons business finance applications are declined

Having a business finance application declined is frustrating, particularly when the funding is needed for a contract, a purchase or a growth opportunity. The good news is that most declines come down to a handful of common issues and many of them can be addressed before an application is ever submitted. Understanding why applications fail is the first step towards improving your chances of approval.

Why lenders say no

Lenders are assessing one core question, how confident are they that the borrowing will be repaid? Anything that raises doubt on that point, whether it’s in the numbers, the paperwork or the purpose of the funding, can lead to a decline. Here are the most common reasons we see.

• Adverse credit history. Missed payments, defaults, county court judgments (CCJs) or previous insolvencies on the business or its directors can prompt a decline, particularly with mainstream lenders and for small business borrowing. Lenders vary widely in how they treat adverse credit, so the right lender matters as much as the profile itself.
• Insufficient cash flow or affordability. Lenders want to see that the business generates enough income to cover the new repayments comfortably alongside its existing commitments. If margins are tight, or the debt would stretch the business too far, an application may fail on affordability alone, even where the credit history is clean.
• A short or limited trading history. Younger businesses often lack the accounts and track record that lenders rely on. While this doesn’t rule out funding altogether, it can narrow the number of lenders willing to consider an application and may mean additional security or a personal guarantee is requested.
• Out-of-date or incomplete financial information. Accounts that are several months or years old, missing management information, or figures that don’t reconcile can make a lender hesitate. Delays in providing documents can also cause an application to stall or be withdrawn.
• Too much existing borrowing. A business that is already heavily leveraged may struggle to take on more debt. Lenders will look at existing facilities, how they are performing and whether the new funding would push the business beyond a sensible level of borrowing.
• Insufficient security or the wrong product. Some applications are declined because the finance requested doesn’t suit the business or what it is being used for. For example, applying for an unsecured loan where an asset-backed or invoice-based facility would be a better fit. Where security is required, a shortfall in value or a title issue on a property can also cause problems.
• Unclear purpose for the funding. Lenders are more comfortable when they understand exactly what the money is for and how it will help the business generate the income to repay it. A vague or poorly explained request can undermine confidence.
• Multiple applications in a short space of time. Each full application can leave a mark on a credit file. Several in quick succession can look like a sign of financial pressure and may make later applications harder to get approved.
• Errors or inconsistencies on the application. Mistakes, mismatched details or information that doesn’t line up with credit files and accounts can raise red flags, even where they are simply honest errors.

How to improve your chances of approval

• Check your credit files before applying. Review both business and personal credit reports so there are no surprises and correct any errors you find.
• Get your paperwork in order. Up-to-date accounts, recent management information, bank statements and a clear picture of existing borrowing allow a lender to decide quickly and with confidence.
• Be clear about the purpose and the repayment plan. Explain what the funding is for, how it will benefit the business and how it will be repaid. A short, well-structured explanation often makes a real difference.
• Match the product to the need. Asset purchases, working capital, property and acquisitions each have finance structures designed for them. Choosing the right one improves both approval odds and the terms on offer.
• Address any issues upfront. If there is something adverse in your history, such as a past CCJ or a difficult period of trading, explain what happened and what has changed. Lenders tend to respond better to openness than to surprises.
• Avoid a scattergun approach. Rather than applying to several lenders at once, target the ones most likely to say yes based on your circumstances.
• A decline isn’t always the end of the road. If an application has been declined, it’s worth finding out why before trying again. A decline from one lender often reflects that lender’s particular appetite rather than the quality of the business itself and another lender with a different approach may view the same application very differently. Restructuring the request, offering additional security, or choosing a different type of finance can all open new options.

Getting the right advice

Working with a broker can help you avoid many of these pitfalls from the outset. We work with a wide panel of lenders and know which are likely to be receptive to types of business and credit profiles. We can help you prepare a strong application, match it to the right lender and product, and present your case in its best light, which reduces the risk of unnecessary declines.

If you’d like to discuss a finance application, or if you’ve been declined and want to explore your options, please call us on 01993 706403 or e-mail enquiries@ngifinance.co.uk.