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Many SMEs refused funding do not know why their bank rejected their loan
application, according to research carried out by
Graydon UK and the FPB.
According to the research, 21% of businesses refused bank funding in the past
six months were not offered a reason from
their bank as to why their application had failed.
Martin Williams, Managing Director of Graydon UK, explained: "It is vital that
business owners and managers enter into a
conversation with their bank in order to find out where their perceived business
challenges lie.
"This will allow them to address these issues in future applications,
considerably improving their chances of securing
funding".
By seeking an explanation from the bank as to why their application was refused,
SME owners may find their bank can actually
help, through helping in the development of a more robust business plan or
providing intelligence into why they are already
at the limit of their lending capacity for their specific region or industry
sector.
Phil Orford, Chief Executive at the FPB added: "Business owners are rightly
expected to present proper financial information
and management accounts in order to boost their credit ratings so it is fair
that lenders also communicate effectively and
provide detailed reasons when finance applications are refused".
According to the research, the most common reason given by banks for refusing
loan applications during the second half of
2009 was because of insufficient security, with 41% of applications rejected for
this reason.
Twenty-eight per cent were rejected because the business sector was deemed too
high risk and 27 % were refused a loan on the
basis of their credit score.
Despite the fact that over a quarter of these businesses failed to secure credit
as a direct result of their credit score,
the research revealed that 22% of businesses do not know what their credit
rating is and only 44% know how to influence their
credit rating.
Williams continued: "This research underlines the vital role a good credit score
plays in helping businesses to secure
funding.
The fear for business owners is that the funding problems facing SMEs will
continue to go unresolved throughout 2010, leaving
businesses starved of funding for another year. Recent reports that the Royal
Bank of Scotland is lobbying the Government to
lower its business lending targets have done nothing to allay these fears".
"It takes time to build up a good credit rating and so businesses need to plan
ahead and think about how they intend to fund
their business over the coming year, and what they can do to build up their
credit rating.
The credit referencing industry is increasingly providing information to
businesses on how they can improve their credit
score.
Businesses who take this advice on board are likely to find it easier to secure
funding despite tough lending conditions
continuing through 2010.
The research also reveals that SME owners believe that a lack of available bank
finance will prove to be the greatest
obstacle facing their business during the remainder of this year.
Almost a fifth of businesses believe that access to finance will be the biggest
hurdle they will come up against this year.
Source: Credit
Control Journal
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