Despite their best efforts, business owners can still be denied finance when applying for a loan from a bank or other financial institutions. And while a loan refusal can be disappointing, and potentially set back business plans, it can also be an opportunity for a business owner to investigate their business finances and make any necessary improvements.
Some of the reasons your client’s application may be unsuccessful include:
- Bad credit history. If their credit history is poor, they can find out the reasons behind the credit rating and try to rectify any errors. To get a copy of a credit report, they can contact the relevant credit reporting agency (find out more about this at the government’s MoneySmart website). If there is more than one owner, it’s also a good idea to check the personal credit history of all the individual business owners as well as the business itself.
- High loan to value ratio (LVR). The LVR is the loan amount shown as a percentage of the market value of the property or asset that is intended to purchase. If a loan is refused due to a high LVR (this is generally isolated to real estate purchases, or with real estate used as security for the loan), this means the business is considered a high risk to the lender. A high LVR can be decreased by reducing the loan amount and increasing equity if possible. Alternatively, it may be possible to shop around and see if other lenders are willing to offer a better deal. See business.gov.au’s “Analyse your finances” page to calculate the LVR.
- Inability to meet repayments. Even with a good LVR, a business may still be refused a loan if there are perceived cash flow problems that may affect its ability to make repayments. Chances can be improved by fine-tuning the business’s financial position (again, see this guidance page at business.gov.au).
Dispute resolution
If a business is refused a loan and the principal of that business disagrees with the decision, it’s often difficult to know what can be done to resolve the dispute. However there are some simple steps that can help guide the situation more to the business’s advantage.
1) Seek feedback. A good first step would be to seek feedback from the bank or financial institution to see why the application was unsuccessful. A simple question would be to ask what can be done to increase the chances next time.
2) Appeal directly to the lender. If unhappy with the feedback or the service received, or if your client disagrees with the reasons provided, they can appeal through the financial institution’s internal appeals process. A complaint can be made directly to the area they dealt with or through the internal complaints handling process.
Regardless of the way a complaint is made, they should always be sure to document important details such as the time and date of the complaint, the names of the people involved and the details discussed.
3) Contact the relevant ombudsman. If a lender has not responded to queries within a reasonable timeframe (the Financial Ombudsman deems this to be typically 45 days), the business owner can make a further complaint to the relevant ombudsman service.
An ombudsman’s office is a free independent organisation that is approved by the Australian Securities and Investments Commission (ASIC), and provided via its MoneySmart service, to mediate disputes between two or more parties. Most registered financial organisations belong to an ombudsman service.
Your client can contact their financial institution to find out which service they belong to or search for them on the relevant ombudsman service website. There is the:
- Financial Ombudsman, which 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, and the
- Credit and Investments Ombudsman, which 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.
Source: Tax & Super Australia
