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Small businesses in dark over refused loans - 09/03/2010

One in five small and medium sized enterprises (SMEs) who are refused funding by their bank do not know why their loan applications are being rejected, according to research published today.

A study conducted by commercial business intelligence provider Graydon UK and business support organisation the Forum of Private Business (FPB), concludes that 21 per cent of small enterprises refused loans in the past six months are unsure why their applications were unsuccessful.

The research also revealed that 22 per cent of businesses did not know their credit rating and 44 per cent did not know how to influence their credit rating. Both Graydon UK and the FPB believe this highlights a worrying lack of communication between banks and their small business customers.

Martin Williams, managing director of Graydon UK, said: "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.

"By seeking an explanation from the bank as to why their application was refused, SME owners may find their bank can actually help, through assisting in the development of a more robust business plan or providing intelligence into why they are already at the limit of their lending capacity."

A total of 41 per cent of applications were rejected due to lack of security, 28 per cent because the bank deemed the business sector too high risk, and 27 per cent of applications were refused on the basis of the applicant’s credit score.

Phil Orford, chief executive of the FPB, said: "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."

The research showed 19 per cent of businesses believe access to finance will be their biggest hurdle in 2010, compared to 11 per cent who believe the financial performance of their business will be their biggest challenge.