Half of businesses give up on funding after bank rejection

24/01/2019

It has emerged that half of British businesses end their search for a new funding facility when their initial application to their high street bank is declined.

The worrying statistic comes despite recent evolution in the commercial finance sector, which has seen huge growth in the number and range of lenders and finance facilities available to businesses.

Fears about fees and a lack of understanding were cited as the main reasons why businesses would end their funding search at that stage, rather than consider an alternative lender.

Despite this, the research from The Genesis Initiative, an SME lobbying group, showed that SMEs are otherwise moving away from their local banks towards alternative lenders in their search for funding.

Accessibility

This recent shift is reflected in the fact that 52.5% of small business owners who have applied for funding over the last two years approached their high street bank first.

While this figure is still quite high, especially given the number of different lenders on the market, as many as four in five businesses were first contacting their bank only two years ago.

Banks remain, of course, one option for businesses who are searching for new funding to consider. Often there will already be a relationship in place, and in many cases the bank will be familiar with the business.

But the downsides are that the bank will typically only be able to offer the products it provides, which can not only be restrictive but also potentially result in a facility being secured that may not be the most suitable option available.

Perhaps a combination of these factors is what led to 46% of applications made to existing banks being declined over the past two years. What’s more surprising, however, is that half of those businesses then decided against looking elsewhere.

What’s stopping them?

Asked why they didn’t pursue alternative avenues, 31% believed specialist funders’ fees and/or interest rates would be too high.

A further 26% said they weren’t confident about approaching a lender they hadn’t heard of before and wasn’t in the mainstream, while 16% were unsure how to find them.

It was telling that the research showed an internet search remains the most popular route that businesses take to find an alternative lender. While this approach may result in a shortlist being drawn up, more often that not the search results will return lenders with the highest marketing budget rather than the best suitability or service levels, for instance.

Second most popular was to approach lenders the business was already aware of, while almost a quarter would rely on a news story they’d read to contact a new lender.

What alternative options are out there?

Particularly in today’s market, a rejection from a high street bank really shouldn’t spell the end of a business’s funding search.

More than half of the businesses surveyed borrowed to fund their activity in the two years leading up to the study, demonstrating how important external finance can be to achieving an array of company objectives.

From improving cash flow to buying a new piece of machinery, each business’s funding requirements differ from another’s. This is why the commercial finance market has progressed in the way it has over the past few years, giving businesses real choice and flexibility.

Spot factoring, for example, has evolved from invoice finance – and now allows businesses to release cash against the value of a single invoice (rather than the entire ledger) to bridge the cash flow gap between providing a service and getting paid.

Loans, meanwhile, are no longer provided by banks alone. Instead, a large number of FinTech and peer-to-peer lenders are providing flexible and affordable loans at competitive rates.

But still, the challenge for businesses is to find the right lender and product for their specific requirements.

As an independent and experienced commercial finance broker, our access to a multitude of lenders allows us to introduce our clients to the most suitable funding facilities. By taking into account the business’s specific requirements, our award-winning team can add real value to your search – whether it’s just beginning or you’ve already been declined for funding. Call us on 0800 9774833 or request a call back to find out more.