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23rd October 2017

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

 

Every year, thousands of smaller business owners tread the path to external finance, pursuing the cash injection that will fuel their next phase of business growth. However, while the SME finance market has strengthened significantly over the past few years and approval rates have risen, some areas of the business community still lag behind – particularly start-ups. 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 that business owners recognise that 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 start-ups 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 businesses 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 that 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 that early-stage SMEs and start-ups find it more difficult to secure finance is that they generally have a higher risk profile than more established businesses. One way that 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 that businesses can 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 business owner or MD, proving that 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 also improve how a business’ prospects are perceived.

Explore all your options

While a business owner’s first instinct may be to head down to the local bank in search of a loan, success rates can be significantly 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 start-ups, such as those associated with Start Up Loans, are likely to be 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), supported by the European Regional Development Fund.

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 that 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 at the British Business Bank, which is managing the delivery of the Midlands Engine Investment Fund, Supported by the European Regional Development Fund.

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

Editors notes

Follow @midsenginv


The #MEIF Quick Reference Guide breaks down the different types of finance available through the Fund and the types of businesses best suited to each. Download it here - https://t.co/RngOaJw0eV https://t.co/EvAftZBCy7 MidsEngInv photo

The @BritishBBank has today released its Small Business Finance Markets Report 2020. Key findings include #MEIF supporting 20% of equity deals in the #Midlands, helping the region's businesses unlock new growth. Read #SBFM2020 here - https://t.co/W32Uh2aPWG https://t.co/MLDHvnredp MidsEngInv photo

20% of equity deals in the Midlands supported by the #MEIF - revealed in the @BritishBBank's #SBFM2020 Report released today - https://t.co/W32Uh2aPWG https://t.co/bCrbzCeChd
MidsEngInv photo
British Business Bank @BritishBBank
Our regional funds, @MidsEngInv and @NPIFBBB, have contributed 20% and 16% respectively to equity deal numbers in the North & Midlands #SBFM2020 #LevelUp

Download the full report now
👉 https://t.co/pSuiMCJXle https://t.co/VzV0nikT14

Growth Hubs are centres for business support, connecting firms to the right help for their needs. With 10 located across the Midlands, find your nearest here - https://t.co/47oT5NP7xK https://t.co/gW78zLZ8Ym MidsEngInv photo

Supporting innovation is a key priority for the #MEIF, with the Fund investing £150k in Birmingham-based @aceleronenergy – a firm developing cutting edge battery technology. In the video below, CEO Amrit Chandan explains how the funding supported the firm’s #Growth https://t.co/im8hET5eGZ

Find Out More

If you would like to meet with one of our appointed Fund Managers to talk in more detail please go to Funds Available to find the Fund Managers operating in your area

Small Business Loans

£25k – £150k

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debt finance

Debt Finance

£100k – £1.5m

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equity finance

Equity Finance

£50k – £2m

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Proof of Concept

Up to £750,000

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Follow @midsenginv


The #MEIF Quick Reference Guide breaks down the different types of finance available through the Fund and the types of businesses best suited to each. Download it here - https://t.co/RngOaJw0eV https://t.co/EvAftZBCy7 MidsEngInv photo

The @BritishBBank has today released its Small Business Finance Markets Report 2020. Key findings include #MEIF supporting 20% of equity deals in the #Midlands, helping the region's businesses unlock new growth. Read #SBFM2020 here - https://t.co/W32Uh2aPWG https://t.co/MLDHvnredp MidsEngInv photo

20% of equity deals in the Midlands supported by the #MEIF - revealed in the @BritishBBank's #SBFM2020 Report released today - https://t.co/W32Uh2aPWG https://t.co/bCrbzCeChd
MidsEngInv photo
British Business Bank @BritishBBank
Our regional funds, @MidsEngInv and @NPIFBBB, have contributed 20% and 16% respectively to equity deal numbers in the North & Midlands #SBFM2020 #LevelUp

Download the full report now
👉 https://t.co/pSuiMCJXle https://t.co/VzV0nikT14

Growth Hubs are centres for business support, connecting firms to the right help for their needs. With 10 located across the Midlands, find your nearest here - https://t.co/47oT5NP7xK https://t.co/gW78zLZ8Ym MidsEngInv photo

Supporting innovation is a key priority for the #MEIF, with the Fund investing £150k in Birmingham-based @aceleronenergy – a firm developing cutting edge battery technology. In the video below, CEO Amrit Chandan explains how the funding supported the firm’s #Growth https://t.co/im8hET5eGZ

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