SMEs should be planning their borrowing strategy long before they need money, ACE Interim Solutions can help you build strong financial business cases and be prepared with our detailed financial modelling and strong financial governance.

Below are some common reasons why loans are declined, and how SMEs can avoid this fate:

1. Approach the right lender for your business needs - In recent years, two very distinct groups of lenders have emerged: banks and ‘fintechs’. Traditional banks now mostly avoid small loans (as a rough rule of thumb, below £25,000). Meanwhile, fintechs, such as peer-to-peer lenders dominate this end of the market.

Banks have more manual loan-application processes (in a low-interest-rate environment, small loans are simply uneconomical for them), while fintechs tend to have highly automated online processes that are strictly ‘rules based’.

It is also important to find out which lenders are active in your sector. In the current climate, banks and other lenders are avoiding or are being ultra-cautious about some areas – for example, obtaining finance has been quite difficult for high-street retailers, restaurants and the leisure sector, which have seen tighter and longer COVID restrictions.

2. Understand your credit history and the potential impact (of the business and it's directors) :- Because of their automated processes, credit scores are especially important to fintech lenders. Banks will sometimes dig deeper into the reasons behind a low credit score, but an automated process just looks at the score itself and a decision is made.

Businesses therefore need to make sure they maintain a healthy credit history. Some of the common causes of lower credit scores include: late or last-minute filing of accounts (there can be a few days’ delay between when accounts are filed and when they are available for credit-scoring algorithms to read, so the algorithm may assume accounts are late if they were only filed at the last minute); late payment of invoices (reporting late payments to credit-scoring agencies is becoming more common – this puts a black mark against the name of the late payer); and judgements or payment defaults against the company (a CCJ has a significant negative impact on a credit score).

3. Financial performance:- Especially in the case of larger loans, lenders will be studying certain financial metrics. They will look at how profitable the business is. With the increased level of debt businesses have taken on over the past 18 months, the ability to generate enough cash to easily cover Bounce Back Loans, CBILS and the proposed loan repayments will be key factors. The overall burden of debt on a balance sheet will be the lender’s main concern.

In the current climate, lenders will expect to look at the very latest annual accounts; waiting right up until the filing deadline will not be acceptable. The expectation will also be that up-to-date management accounts are presented with an application. Annual accounts are seen as historic, hence the need for current-year trading information.

4. Issues with bank statements:- Particularly for loans above the ‘automated’ assessment threshold, lenders will be studying bank statements and reject applications where repeated patterns of bounced cheques or unplanned overdrafts are evident.

5. Applying at too early a stage:- Start-ups are generally a no-go for debt finance, due to their higher risk and lack of trading record. As a rule of thumb, debt finance can be considered after 12 months of trading history has been established.