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Rejecting rejection – What to do when your application for finance is denied

For many fast-growth businesses, the route to finance can be fraught with setbacks. However, having an application for external funding denied should not act as an impediment to growth, if reacted to effectively.
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Every year, thousands of small business owners tread the path to external finance, pursuing a cash injection that will fuel the next phase of growth. However, while the SME finance market has strengthened over the past few years and approval rates have risen, some areas of the business community still lag behind – particularly startups.

Facing rejection from a lender can be extremely demoralising, and cause business-critical delays that dent revenues, impede day-to-day operations and knock stakeholder confidence.

In an ever-changing funding landscape, it’s critical bosses recognise there is no “one size fits all approach”. Only by preparing thoroughly and assessing both traditional and alternative finance sources, can owners and managers hope to secure the finance that best serves the growth ambitions of their businesses.

A close examination of debt applications clearly illustrates the difficulties faced by finance-seeking SMEs. The British Business Bank’s latest Small Business Finance Markets Report suggests that in the 18 months to June 2016, approximately eight out of ten applications for debt finance were approved. Isolate those for startups and this figure plummets to less than 50 per cent.

The funding options available to SMEs are more diverse than ever before, and there is a great deal that bosses can do to ensure they are finance ready. Much of this preparation should involve, where possible, reducing the risk profile of the business.

Over 25 per cent of debt applications are denied due to businesses not having enough security, over 20 per cent because the business owner has a poor credit rating, and approximately 15 per cent because the firm does not have enough equity or sufficient trading history. Identifying and offsetting these weaknesses is key.

Prepare early

It’s essential SMEs begin to weigh up finance options as soon as possible, rather than delaying applications until additional funding is an urgent necessity, a move that will turn off potential funders.

Before submitting an application, business owners should consider seeking advice from experts such as accountants or finance brokers, as well as utilising online finance referral platforms such as those introduced as part of the Bank Referral Scheme, Funding Options, Funding Xchange and Business Finance Compared, to assess the scope of products on offer.

One of the reasons early-stage SMEs and startups find it difficult to secure finance is a higher risk profile compared to more established businesses. One way this can be addressed is through the development of a clear business plan, including an overview of how the debt will be serviced and repaid. The plan should demonstrate a sensible level of ambition and use tangible measures to evidence growth – a strong order book and detailed costings for anticipated capital expenditure can again increase lender confidence.

Another way to demonstrate robustness to potential lenders is through resilience, or “bench strength” within the leadership team. Rather than all decision-making and responsibility sitting with the owner or MD, proving there are credible people across the business will reduce the likelihood of illness or absence causing undue disruption. Similarly, appointing additional expertise ahead of time, such as a part-time finance director, or reducing the reliance on one or two large clients through diversification can improve how a business’ prospects are perceived.

Explore all your options

While an employer’s first instinct is to head down to the local bank in search of a loan, success rates can be raised by also considering specialist lenders that are interested in partnering with businesses of a certain size, industry or location. For fledgling businesses, finance organisations that focus on lending to SMEs or startups, such as those associated with Start Up Loans, are likely better equipped to support businesses with fewer assets or a shorter trading history.

Similarly, local business organisations such as Local Enterprise Partnerships (LEPs) and Growth Hubs are ideally placed to understand the market forces at place in regional business communities and advise on relevant funds. In particular, businesses may also have access to regional-specific funds such as the Midlands Engine Investment Fund (MEIF) and Northern Powerhouse Investment Fund (NPIF).

Debt vs. equity

For some businesses, especially those with a higher risk profile but significant growth ambitions, equity investment through business angels or venture capital could prove the most beneficial route. In addition to financial investment, SMEs can secure long-term advice and input from a highly-qualified and connected individual that mentors them or sits on the business’ board, often as a non-executive director.

To work, a good relationship between business owner and investor is essential, and often forsaking a higher business valuation or level of investment in favour of a better working partnership can be more beneficial.

Although a notable proportion of SMEs still suffer from setbacks in the quest for finance, it’s vital businesses reject rejection – weighing up all available options and making all necessary preparations to pave the route to success. By understanding the perceived strengths, weaknesses, opportunities and threats of the business, as well as the range of finance spanning traditional, alternative, debt and equity, owners and MDs can reduce disruption and maximise their chances of business success and achieving growth.

Patrick Magee is chief commercial officer of the British Business Bank, which is managing the delivery of the Midlands Engine Investment Fund

SME owners can find a comprehensive overview of the finance options available to their business via the Business Finance Guide

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