Banks urged to explain lending decisions

FPB calls for greater transparency when business loan applications are rejected

9 March 2010 12:03

Free guides

More than 20% of small businesses turned down for bank loans have no idea why their applications were rejected, research has found.

According to research by credit referencing agency Graydon UK and the Forum of Private Business (FPB), 21% of small and medium-sized businesses refused bank finance in the past six months were not told why their application was unsuccessful.

For those who were offered an explanation, the most common reason cited by the banks in the second half of 2009 was inadequate security on which to guarantee the finance, with 41% of applications rejected for this reason.

Almost 30% were dismissed because the sector they were operating in was deemed “high risk”, while a further 27% were let down by their credit score.

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. 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, small business 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 for their specific region or industry sector.”

Phil Orford, chief executive of the FPB, said business owners needed to make sure they were presenting proper financial information, but also called on the banks to provide detailed reasons when loan applications are turned down.

“We have entered a new business landscape where a more collaborative approach between businesses and banks is required if the future of enterprise and the economy is to be a healthy one,” he said.

“Securing finance is the main priority of the vast majority of small businesses. Economic conditions remain extremely tough and, even when the economy does recover substantially, growth finance will be important to allow them to keep up with demand.”