A bank declining a business loan because of “insufficient cash flow” can be frustrating.
Particularly when you know the business is trading, the bills are being paid and there appears to be enough money moving through the account.
The problem is that business owners and banks do not always measure cash flow in the same way.
A bank is not only asking whether the business has money in the account today.
It is asking:
After allowing for tax, existing loans, personal commitments and the proposed new debt, is there enough sustainable income to comfortably meet the repayments?
That is a very different question.
Why profitable businesses still get declined
A business can show a profit and still fail a lender’s servicing assessment.
Common reasons include:
- high existing loan repayments
- significant personal or property debt
- large one-off expenses
- directors taking inconsistent wages or drawings
- tax debts or payment arrangements
- retained profits that do not match the actual cash position
- rapid growth absorbing working capital
- related-party expenses
- recent changes in trading performance
- poor-quality or outdated financial information
The bank may also apply its own adjustments to the figures.
Some expenses may be added back. Others may not.
Some lenders will use the latest financial year. Others may consider more recent management figures, BAS or business bank statements.
Two lenders can review the same business and arrive at different answers.
What does a lender usually assess?
Business profit
The starting point is usually the underlying profit generated by the business.
The lender may review:
- profit before tax
- depreciation
- interest expenses
- director wages
- one-off costs
- abnormal income
- related-party transactions
The aim is to determine the business’s normal ongoing earning capacity.
Existing commitments
A lender will not assess the proposed loan in isolation.
It will also allow for:
- existing business loans
- equipment finance
- credit cards
- overdrafts
- home loans
- investment property loans
- personal loans
- tax commitments
- living expenses
A business might generate strong income but still have limited borrowing capacity because too much of that income is already committed.
Tax position
Outstanding tax debt does not always mean an automatic decline.
However, lenders will want to understand:
- how the debt arose
- whether lodgements are up to date
- whether a payment arrangement is in place
- whether the business can afford both the tax repayments and the new loan
- whether the tax debt indicates a broader cash-flow problem
Ignoring the tax debt or hoping the lender will not notice is not a strategy.
It is better to explain it properly and show how it will be managed.
Recent performance
Historic accounts may not tell the full story.
A business may have:
- won new contracts
- lost a major customer
- reduced expenses
- increased margins
- opened a new location
- suffered a temporary downturn
- invested heavily in growth
Some lenders are prepared to consider recent evidence. Others place much greater weight on completed tax returns and financial statements.
The application needs to be directed to a lender whose assessment method suits the actual circumstances.
Does one bank declining mean the deal cannot be done?
No.
But it also does not mean that another lender will automatically approve it.
The first step is to work out why the application failed.
Was it:
- genuine insufficient income?
- the way the income was calculated?
- lender policy?
- property security?
- the industry?
- the loan term?
- existing debt?
- an incomplete explanation?
- the wrong lender for the transaction?
Submitting the same figures to five more lenders without fixing the underlying issue is unlikely to help.
It can also create unnecessary credit enquiries and make the transaction appear more difficult than it originally was.
A declined decision tells you what is needed to get the deal approved. Can the issues raised be rectified?
The presentation matters
Commercial lending is not only about collecting documents.
It is about explaining the transaction.
A strong submission should clearly set out:
- who the borrowers are
- what the business does
- what the funds will be used for
- how the business has performed
- what existing debts need to be allowed for
- what the proposed repayments will be
- how the loan will improve or support the business
- what risks exist
- how those risks are addressed
Banks do not approve deals because an application is optimistic.
They approve deals when the transaction makes sense and the risks have been properly dealt with.
What about low-doc or alternative lending?
Alternative documentation can help in the right circumstances.
Some lenders may consider:
- BAS
- business bank statements
- accountant declarations
- interim management figures
- self-declared income supported by other evidence
That can be useful where the formal accounts do not yet reflect the current strength of the business.
However, low-doc does not mean no assessment.
The lender still needs a reasonable basis to believe the loan can be repaid.
Alternative lending may also involve higher interest rates, additional fees or a shorter loan term.
It should be used because it suits the transaction, not simply because the bank said no.
Sometimes the honest answer is “not yet”
Not every declined transaction should immediately be pushed to a more expensive lender.
Sometimes the best approach is to spend the next three to six months:
- reducing short-term debt
- bringing tax lodgements up to date
- improving account conduct
- building cash reserves
- documenting new contracts
- improving the quality of financial reporting
- showing a sustained improvement in profit
That may create a much stronger application and a better long-term result.
The bottom line
A cash-flow decline does not always mean the business is unfinanceable.
It may mean the wrong lender was approached, the transaction was structured poorly or the true business position was not properly explained.
It may also mean the numbers genuinely do not support the requested debt.
I cannot promise that every declined deal can be approved, nobody can.
What I can do is work out what the lender has seen, whether there is another reasonable option and what needs to change if the business is not ready yet.
Has your bank declined a business or commercial finance application?
Send the scenario through for a second assessment to Shaun Lawson from Your Business Loan Guy.
All lending is subject to lender policy, assessment and approval. This information is general in nature and does not constitute financial, legal, taxation or credit advice.