Banjo lifts the lid on why some business loan applications get rejected, and what you can do to make sure your clients get the green light.
Every lender’s business loan eligibility criteria and appetite are subtly different, but there are a few common factors that will give your client’s application the best chance of a thumbs up.
"The number one reason an application fails is because it's for a non-profitable business"
- Nicholas Rogers, Banjo Head of Sales
According to Nick Rogers, Head of Sales at Banjo, “For that first application for any client, doing the solid foundational work up front is critical. Get to know their financials, understand their debt levels. Are they generating enough profit and cash to service the debt? Can they afford to honour the commitment under the payment arrangement?”
“Invest in doing the hard yards on the initial application, because when that’s successful, it keeps the client coming back for more as their business grows. With each next loan application for them your work gets easier, and your reward for effort on those subsequent transactions goes up.”
Here are some of the most common reasons businesses are rejected for loans, and how you can avoid them:
The number one reason an application fails is because it’s for a non-profitable business, says Nick Rogers.
“Don’t put a business that isn’t making a profit up for a loan. Profit and in turn free cashflow is what pays the debt back. If they’re making a loss or a very small profit, you’re doing them a disservice by putting debt in there. Sometimes a lender can work with future growth plans – but don’t rely on it.”
A low credit score or undesirable credit history
Make sure there are no surprises. The client should already know their credit score, but if they don’t, get them to remedy that straight away, using the free options available.
This is not taken lightly by lenders. They’ll want to know why the business had the arrears, and whether there’s a payment plan in place. If there was non-lodgement, what was the reason?
“ATO debt doesn’t have to be a deal breaker, but don’t be complacent about it. Work with the client to demonstrate what they’re doing to ensure it doesn’t recur,” says Jane Martini, Senior Credit Executive at Banjo.
Failing to meet minimum eligibility criteria
This includes not being in operation for a minimum period stated by lender; and sales that fall under the level required. Always understand the criteria (see our product pages for details).
Jane Martini points out that if there are strong mitigating reasons for an otherwise solid business not meeting the loan criteria, the lender may be prepared to look at the context.
“At Banjo, we’re prepared to listen if there are true mitigating circumstances.”
Jane gives an example of a Banjo client who ran a very successful business with her husband, both directors. Following their divorce, she retained the business, and he kept other assets. However, as a result of this, the woman’s credit score suffered a temporary setback, and she fell below Banjo’s minimum eligibility criteria. The broker understood both the situation and the business very well, having worked with that client over several years. He thoroughly prepared the application, and shared the scenario and current context with Banjo, as to why her credit score had suffered.
This, together with the underlying strength of the business, and the provision of a guarantee from the director, meant that Banjo ended up approving the loan. Eighteen months later, the business is thriving and the client has been able to borrow on further occasions to continue growing her business.
Missing important information or paperwork within the application
What are the characteristics of the data that you have for the client’s business? Is there the right volume and variety of data? Is it up to date and verifiable?
If it’s just the regular monthly or quarterly document, what else could they provide you with that you could share with the funder?
Nick Rogers describes a recent Banjo transaction that was almost rejected due to lack of data. The client’s accountant had not been providing up to date financial information. This had forced the client to take out multiple low-doc loans, which from Banjo’s perspective would normally mean his application would be rejected. However, once Banjo looked more closely, it became clear that the client had been neglected by the accountant.
“Brokers need to stress how important it is to have financial information that’s up to date and relevant, and how this information will look in the eyes of the funder. Ask the client to go back to the accountant to get better data. Or encourage them to find a more suitable adviser.”
Finally, don’t give up on the client if they’re not loan-ready. Talk with them about what they can do to get to that point. Some clients that are not in the right place now can, with a little help, turn around to be a worthwhile option for years to come.