Why Has My Business Loan Application Been Declined?

Having a business loan application declined can be frustrating, particularly if the business is profitable, has strong turnover or has successfully borrowed in the past.

A decline doesn't necessarily mean that your business is financially weak.

Business lenders have different credit policies, risk appetites and eligibility requirements. A business that falls outside one lender's criteria may be acceptable to another.

However, a decline can also identify a genuine issue with the application.

Common reasons include insufficient cash flow, too much existing debt, poor recent bank conduct, adverse credit, insufficient trading history or simply requesting more than the business can comfortably afford to repay.

Understanding the reason for the decline is usually the best starting point before making another application.

Why do business lenders decline applications?

Every lender has its own underwriting criteria.

When assessing a business loan, a lender is ultimately trying to answer two fundamental questions:

Is the business likely to repay the loan?

and

What happens if it doesn't?

To answer these questions, the lender may consider:

• turnover;

• profitability;

• cash flow;

• liquidity;

• recent bank conduct;

• existing borrowing;

• credit history;

• trading history;

• industry;

• purpose of the loan;

• directors and shareholders;

• personal guarantees; and

• available security.

A weakness in one area doesn't necessarily result in a decline.

The decision usually depends on the overall lending proposition and the lender's particular appetite for risk.

Is my business loan being declined because I asked for too much?

This is a common reason.

A business may be perfectly capable of supporting some additional borrowing but not the amount requested.

For example, a company might apply for £100,000 but the lender's assessment suggests that £50,000 is a more appropriate exposure.

The amount a business can borrow is usually influenced by factors such as:

• average monthly revenue;

• cash generation;

• existing debt repayments;

• repayment term; and

• available security.

For some forms of short-term business lending, a broad rule of thumb might be borrowing of around one to two months of average revenue, although actual lending decisions depend on considerably more than turnover alone.

If the amount requested is the problem, another lender may offer a smaller facility rather than declining the application entirely.

Can strong turnover still result in a decline?

Yes.

Turnover tells the lender how much revenue enters the business, but it doesn't tell the lender how much cash is available to repay debt.

A company generating £2 million of annual revenue can still experience financial pressure if:

• margins are very low;

• customers pay slowly;

• operating costs are high;

• large amounts of cash are tied up in stock;

• tax liabilities are overdue; or

• existing finance repayments are substantial.

This is why lenders normally consider cash flow and affordability alongside headline turnover.

A high-turnover business isn't automatically a low-risk borrower.

Can poor cash flow cause a business loan decline?

Yes.

Cash flow is fundamental to loan affordability.

The lender needs to be comfortable that the company will have enough cash available to make each repayment while continuing to meet its other obligations.

Warning signs might include:

• continually declining bank balances;

• frequent use of an overdraft limit;

• repeated returned payments;

• substantial creditor arrears;

• increasing short-term borrowing; or

• insufficient cash remaining after existing debt repayments.

A profitable business can still have weak cash flow.

This is particularly common where customers take a long time to pay or the company needs to fund substantial working capital.

Can my bank statements cause my application to be declined?

Yes.

Business bank statements can provide lenders with a detailed picture of the company's recent financial behaviour.

A lender may identify:

• declining revenue;

• repeated returned Direct Debits;

• unpaid finance repayments;

• heavy overdraft utilisation;

• payments to multiple existing lenders;

• unusual transactions;

• low average balances; or

• evidence of financial pressure.

One unusual transaction or returned payment doesn't necessarily cause a decline.

A repeated pattern is more significant.

Banking information can also sometimes provide a more current picture than filed accounts, which may relate to a financial period that ended many months previously.

Can too much existing borrowing cause a decline?

Absolutely.

One of the most important questions in SME lending is how much debt the business already has and how much it is paying to service it.

Suppose two companies each generate £100,000 of monthly revenue.

The first has £3,000 of monthly loan repayments.

The second has £25,000 of weekly and monthly finance commitments.

Despite identical turnover, their capacity to take on additional borrowing is very different.

A lender may therefore decline an application where it believes another loan would make the company's overall debt burden unsustainable.

What is loan stacking?

Loan stacking generally refers to a business taking multiple finance facilities, often over a relatively short period.

Having more than one loan isn't automatically a problem.

A company might legitimately use different facilities for different purposes.

However, repeatedly adding short-term loans can become concerning where each new facility is partly required to support repayments on earlier borrowing.

A lender may therefore look at:

• number of existing facilities;

• how recently they were taken;

• total outstanding balances;

• combined repayments; and

• whether overall borrowing is increasing rapidly.

A business continually adding debt without corresponding growth in cash generation may eventually reach the point where further borrowing is inappropriate.

Can bad credit cause my business loan to be declined?

Yes.

Credit problems can include:

• CCJs;

• previous defaults;

• missed loan payments;

• insolvency history;

• poor payment history; or

• adverse personal credit involving directors or guarantors.

However, lenders have very different approaches to adverse credit.

Some lenders operate strict automated rules.

Others assess the nature and circumstances of the credit issue.

A small historic satisfied CCJ, for example, presents a different risk from several recent unsatisfied judgments.

A decline from one lender because of adverse credit doesn't necessarily mean every lender will reach the same conclusion.

Can a director's personal credit cause a decline?

Potentially.

Although a limited company is legally separate from its directors, SME lenders may also consider the credit history of relevant directors, shareholders or proposed personal guarantors.

This can be particularly important where the director is providing a personal guarantee.

A lender might identify:

• personal CCJs;

• defaults;

• insolvency;

• substantial personal debt; or

• other significant adverse credit.

The importance placed on personal credit varies between lenders.

Can insufficient trading history cause a decline?

Yes.

Many business lenders have minimum trading-history requirements.

A lender specialising in established SMEs may require businesses to have traded for two years or more.

Another may consider companies after only six or twelve months.

If your company doesn't meet the minimum trading requirement, the lender may decline the application regardless of how well the business is currently performing.

This is a criteria decline rather than necessarily a credit-quality decline.

The business may simply be applying to the wrong type of lender.

Can my industry cause a business loan decline?

Yes.

Lenders don't necessarily finance every business sector.

A lender may restrict or exclude particular industries because of:

• historical loss experience;

• regulatory risk;

• volatility;

• reputational considerations;

• difficulty assessing the business model; or

• internal credit policy.

A financially strong company can therefore be declined simply because it operates in a sector outside the lender's appetite.

Again, that doesn't necessarily indicate anything negative about the company's underlying financial health.

Can HMRC arrears cause a decline?

Potentially.

Outstanding tax liabilities can indicate that a business has experienced cash-flow pressure.

A lender may want to understand:

• amount owed;

• type of tax involved;

• how long it has been outstanding;

• whether HMRC has agreed a Time to Pay arrangement;

• whether payments under that arrangement are being maintained; and

• whether new tax liabilities are being paid when due.

A well-maintained formal repayment arrangement can present a different risk from rapidly increasing unpaid tax liabilities with no repayment plan.

The overall position matters.

Can losses cause my application to be declined?

Yes, although an accounting loss doesn't automatically mean a company cannot borrow.

The lender will want to understand why the loss occurred.

For example, a business might have made a loss because it:

• invested heavily in expansion;

• incurred significant one-off costs;

• lost a major customer;

• experienced temporary disruption; or

• is structurally unprofitable.

Those circumstances present very different lending risks.

Recent trading can therefore be important when historical accounts show a loss.

If current performance has improved substantially, providing up-to-date management information can help demonstrate that.

Can declining turnover cause a business loan decline?

Yes.

A lender may be concerned where revenue has fallen significantly, particularly if operating costs and existing debt haven't reduced accordingly.

The direction of travel can be as important as the absolute level of turnover.

For example:

£100,000 → £110,000 → £120,000 monthly revenue

presents a different trend from:

£120,000 → £100,000 → £75,000 monthly revenue.

Both businesses might report similar annual turnover, but their current positions are very different.

The lender will usually want to understand the reason for any material decline.

Can returned Direct Debits cause a decline?

Potentially.

One failed payment may have a perfectly reasonable explanation.

Repeated returned payments are more concerning because they can indicate that the company regularly doesn't have sufficient cash available to meet its obligations.

Returned payments to finance providers are particularly relevant.

A lender may question why it should expect its own repayments to be maintained if existing lenders are already experiencing payment failures.

The pattern, frequency and recent trend are important.

Can a business loan be declined because of the purpose?

Yes.

Lenders often have restrictions on how their funds can be used.

Even where a purpose is permitted, the lender may decide that the proposed borrowing doesn't make commercial sense.

For example, borrowing a large amount over a very short term to finance an investment that won't generate returns for several years may create a mismatch between the funding and its purpose.

Similarly, taking additional expensive borrowing simply to service existing debt can increase financial pressure rather than solve it.

The lender may therefore consider what the money is being used for as well as whether the company can technically make the repayments.

Can I be declined even if I've borrowed successfully before?

Yes.

A previous approval doesn't guarantee another one.

The company's financial position may have changed.

The lender's criteria may also have changed.

Since the previous loan, the business might have:

• increased its debt;

• experienced lower revenue;

• developed adverse credit;

• suffered weaker cash flow; or

• changed ownership.

Conversely, the lender itself may have reduced its appetite for a particular sector or type of borrowing.

Every application is assessed according to the circumstances at that time.

Why won't the lender tell me why I was declined?

Some lenders provide detailed feedback, while others give only a general reason.

This can be frustrating.

Automated lending systems can also produce decisions based on combinations of factors rather than one obvious issue.

If possible, ask whether the decline related primarily to:

• credit;

• affordability;

• trading history;

• industry;

• amount requested; or

• another eligibility criterion.

Even a broad explanation can help determine what to do next.

Should I immediately apply to another lender?

Not necessarily.

Before making another application, try to understand why the first one failed.

If the issue was simply that the lender doesn't finance your industry, another appropriately selected lender may be worth approaching.

If the problem was that the company cannot afford its existing debt, submitting applications to another five lenders isn't likely to solve the underlying issue.

Multiple applications can also result in additional credit searches.

It is usually better to diagnose the problem before applying again.

Does being declined affect my credit score?

The decline itself doesn't necessarily damage your credit score.

However, the credit search associated with the application may be recorded depending on the type of search undertaken.

If the lender carried out a hard personal credit search, that search can remain visible even though the application wasn't successful.

This is another reason to avoid submitting numerous applications immediately after a decline without understanding the problem.

Can I apply again after being declined?

Potentially.

Whether it makes sense depends on the reason for the decline and what has changed.

For example, a new application might be stronger after:

• reducing existing borrowing;

• clearing arrears;

• improving bank conduct;

• establishing a longer trading history;

• increasing revenue;

• satisfying a CCJ; or

• providing additional financial information.

In other cases, there may be no need to wait if the issue was simply that the original lender wasn't appropriate for the business.

What should I do after my business loan is declined?

Start by identifying the most likely reason.

Then determine whether the issue is:

Lender-specific.

The business simply falls outside that lender's appetite.

Application-specific.

The amount, term or structure requested wasn't appropriate.

Business-specific.

There is an underlying financial or credit issue that needs to be addressed.

That distinction determines the sensible next step.

We'll look at this in more detail in What Should I Do After Being Declined for a Business Loan?

Applying for business finance after a decline with Adelpha Capital

Adelpha Capital provides business finance to established UK SMEs.

A decline from another lender doesn't necessarily mean that Adelpha will reach the same decision. Different lenders have different credit criteria and approaches to underwriting.

We assess the overall lending proposition, including turnover, cash flow, recent bank conduct, trading history, existing borrowing and relevant credit information.

Where an application falls outside our appetite, we also aim to make lending decisions based on the underlying circumstances rather than relying solely on a headline credit score.

If your business has previously been declined for finance, you can apply online or contact the Adelpha Capital team to discuss your requirements.