Banks reject more than 70% of business loan applications.
This estimate, cited by the International Finance Corporation (IFC), underscores the problem many SMEs face when they try to access finance.
Why are so many business loan applications declined?
We’re uncovering some of the key mistakes SMEs make when applying to banks for business loans.
The reasons banks reject business loan applications
The high rejection rate for business loans is worrying when you consider one of the main reasons SMEs fail is due to lack of funds.
“… access to finance is a key constraint to SME growth, it is the second most cited obstacle facing SMEs to grow their businesses in emerging markets and developing countries,” reports the World Bank.
For too many business owners, capital is the only thing standing in the way of achieving their goals.
So, many businesses use their own cash or they turn to family and friends, according to this SME South Africa assessment.
The problem with this approach is your growth is limited by the capital you can access from your network.
And that’s why business owners turn to other sources of income.
Now, research from the Organisation for Economic Co-operation and Development shows more and more business owners are exploring alternative funders; many business owners, however, still apply to apply to banks for business loans.
But traditional funders like banks have rigorous criteria: requirements that are often not suited to small to medium sized businesses.
“Our banks’ credit products are usually inflexible in their loan requirements and take a long time to process more complicated credit applications,” said Johan Bosini, a partner at Quona Capital, in this Business Tech article.
We’ve gathered the research and discovered the main mistakes SMEs make when applying for business loans include:
- Not providing enough information
- Not attaching collateral
Here’s the detail.
1. Not providing enough information
When Imraan Moos, a South African business owner, considered applying for finance to grow his business, he approached his bank.
To complete his application, Moos needed to complete a 30-page document.
It’s a mountain of paperwork most business owners know well.
SMEs in South Africa must endure lengthy application processes and submit tons of financial data.
A FinFind investigation into the obstacles facing SMEs calls out financial documentation as a barrier to obtaining business loans.
“Without these documents, the funder is unable to process the funding application, and the
SMME is unable to secure the funding they need.”
Here’s the caveat, though.
Thorough financial record-keeping isn’t a bad thing for your business. It’s exactly what you need to make the best decisions for your SME’s financial future.
More from the FinFind report:
“Many SMMEs struggle with financial recordkeeping and as a result are unable to produce up-to-date management accounts and other vital financial documents. Without these, they are not only unable to access finance, but they are also ill-equipped to make decisions in their business or properly manage their cash flow.”
At Lulalend, we’re a strong believer in the power of financial record-keeping. When you have financials in order, you always have your finger on the pulse of your business health. You’re in a position to identify weaknesses and act before they pose a threat to growth.
But there’s a difference between the kind of data you need to better run your business and the onerous information banks require to process your application.
Let’s take a look at an example.
Before Standard Bank will consider your business loan application, you’ll need to submit:
- Business plan
- Cash flow forecast
- Sales and purchase budgets
- Projected income statements
- Personal statements of assets and liabilities for all partners or directors
It’s why digital funders, like Lulalend, only require your last three months bank statements. Based on the historical financial data of the business, Lulalend can make a judgement on the business health.
Lulalend extracts the data automatically—and securely—from your bank statements, speeding up the approval process. This is why you recieve your business funding in 24 hours, versus weeks or months with a traditional funder.
2. Not attaching collateral
For SMEs seeking business loans to grow, attaching collateral might swing the scales in their favour.
The South African Banking Association report into SME finance found not attaching collateral was one of the main reasons banks reject loans.
Here’s where unsecured loans, where no collateral is required, makes a massive difference.
Unsecured lending is especially useful for SMEs, said Roelof Botha, an economist.
“Unsecured lending is also, as a rule, the only source of financing of working capital for small, medium & micro enterprises (SMMEs),” Botha told Business Tech.
“An expansion of access to unsecured credit by financial institutions holds the obvious potential advantage of assisting the quest for higher economic growth, employment creation and, as an inference, a broadening of the tax base,” adds Botha.
Banks, for their part, ask for collateral because they want a guarantee you will repay the money.
Alternative funders assess your business performance in real-time. By using scoring technology, Lulalend can make a judgement on a business owner’s affordability and risk. This detailed analysis means you don’t need collateral.
Business loans built for SMEs
Alternative funders are meeting the needs of business owners. By designing business loans specifically for SMEs, fintech companies especially have been able to serve South African businesses.
If you want to learn more about how funding with Lulalend works, learn more about how to apply for business finance within minutes here.