Lending down for start-up businesses

More than half (54%) of first time applications for business loans or overdrafts are being rejected by banks, according to the latest figures by independent research consultancy BDRC.

This means many start up salons and self-employed therapists are likely to have difficulty securing the financing they need, and be forced to resort to avenues such as personal financing in order to bank roll business ventures. 

The Forum for Private Business (FPB) said these figures show a significant drop in approval rating for first time applicant lending, which highlights the ongoing problem with business banking in the UK. In 2010, the rate of unsuccessful first time applicants was 42%. 

The new data indicates a sizeable increase in personal cash used for business ventures, with 34% of respondents stating that this was not through choice, a 9% rise on two years ago. 

However, the news for established businesses is more positive, with only 21% of non-first time applicants for loans and 8% of loan renewal requests unsuccessful.

FPB spokesman Robert Downes said: “The long and short of it is that in 2012 firms seeking credit for the first time – usually the ones who need it most – are the ones more often than not being refused access to credit from lenders. And it’s got markedly worse in a short period."

He added: “Simply put, the banks' risk-averse nature is stifling the next generation of business owners – and the government is idly watching from the sidelines.”

Many start-ups and small business owners are unaware of the loan appeals system, which was introduced two years ago. The system allows unsuccessful applicants to appeal the banks’ decision.

However, according to BDRC’s findings only 14% of unsuccessful overdraft applicants and 8% of failed loan applicants knew about the system, while as many as 66% rated the feedback they’d received as poor.

“Such lack of awareness is a huge fail by anyone’s standards,” said Downes. “There’s a good case for an opt-out system here, so businesses would automatically enter an appeal unless they chose not to. Whatever the answer, the status quo is clearly not sufficient.” 

It’s not all negative, however. According to the figures, banks are actually approving 70% of overdraft applications, although more than a third of small and medium enterprises asked were discouraged from applying for an overdraft as they assumed they’d be rejected.

“We also need to see a bit of encouragement for SMEs to get out there and apply for finance, particularly with it being cheaper than it has been for quite a while due to the Funding for Lending Scheme,” added Downes.