How to manage business loan refusal
While a loan refusal can be disappointing, it's often a great opportunity to investigate your business finances and make any necessary improvements.
Potential reasons for loan refusal
Even with your best efforts, you may still be denied finance when applying for finance with a financial institution. Some of the reasons your application may be unsuccessful include:
Bad credit history
If your credit history is poor, find out the reasons behind the credit rating and try to rectify any errors. To get a copy of your credit report, contact the relevant credit reporting agency. Make sure you check the personal credit history of all the individual business owners as well as the business.
High Loan to Value Ratio (LVR)
Your LVR is your loan amount shown as a percentage of the market value of the property or asset that will be purchased. If you're refused a loan due to a high LVR, this means you're a high risk to a lender. You can decrease your LVR by reducing your loan amount and increasing your equity. Alternatively, you can shop around and see if other lenders are willing to offer you a better deal. See our Analyse your finances page to calculate your LVR.
Inability to meet repayments
Even with a good LVR, you may still be refused a loan if you have cash flow problems that may affect your ability to make repayments. You can improve your chances by improving your financial position.
Lack of security
Banks will sometimes decline loans if you don't have any assets to secure against the loan.
If you're refused a loan and you disagree with the decision, it's often difficult to know what you can do to resolve the dispute. Below are some of the recommended steps you can take:
Seek feedback from your financial institution to see why your application was unsuccessful. Ask them what you could do to increase your chances next time.
Appeal directly to the lender
If you're unhappy with the feedback or service you received or disagree with the reasons provided, you can appeal through your financial institution's internal appeals process. Your complaint can be made directly to the area you dealt with or through the internal complaints handling process.
Regardless of the way you provide your complaint, always make sure you document important details such as the time and date of the complaint, the names of the people involved and the details discussed.
Contact the Ombudsman
If a lender hasn't responded to your complaint within a reasonable timeframe (typically 45 days), you can make a further complaint to the relevant ombudsman service.
An ombudsman is a free independent organisation that is approved by the Australian Securities and Investments Commission (ASIC) to mediate disputes between two parties. Most registered financial organisations belong to an ombudsman service. Contact your financial institution to find out which service they belong to or search for them on the relevant ombudsman service website:
- Financial Ombudsman Service (FOS)
FOS handles complaints against banks, credit unions, foreign exchange dealers, deposit takers, credit providers, mortgage brokers, general insurers, insurance brokers, life insurers, funds managers, financial advisers and planners, stockbrokers and some superannuation providers.
- Credit Ombudsman Service Limited (COSL)
COSL handles complaints against credit unions, building societies, non-bank lenders, mortgage and finance brokers, financial planners, lenders and debt collectors, credit licensees and credit representatives.
- Financial Ombudsman Service (FOS)
If you're unhappy with the ombudsman's decision or your complaint is not the type handled by the ombudsman service, it's possible to take the matter to court. Contact a legal advisor or lawyer to discuss your options.
What to do...
- See the MoneySmart How to complain and Loan rejection pages for detailed information and tips.
- Visit the MoneySmart website to find out how to get a copy of your credit report.
- Visit the Financial Ombudsman Service website or contact them on 1300 78 08 08 for more information on making a complaint.
- Visit the Credit Ombudsman Service Limited website or contact them on 1800 138 422 for information on making a complaint.
- Find your nearest financial counsellor on the Insolvency and Trustee Service Australia (ITSA) website.
- If you're looking for finance to take advantage of a new export opportunity but have had your loan refused from the bank due to lack of security, Efic can provide access to unsecured loans based on your business's ability to service the loan.