Why banks reject applications for finance

Article by Cathryn Hayes

Revive! Auto Innovations

Insufficient income to pay back the loan

The bank will look at the cash flow forecasts within your business plan and check that the business is likely to generate enough cash to cover its costs, including the loan repayments.

It may be that you need to take a closer look at your business plan, making sure that all the necessary information is included and check that the figures make sense.

Other sources of income

Lenders always worry about the ability of a new franchise to provide enough income for the owner to live on and service any borrowings they have, particularly in the early years.

Luckily, many franchisees have a supportive partner behind them who often continues to earn a regular wage. This additional household income reduces the franchisee's dependence on the profits of the business.

It is therefore important that a franchisee provides a summary of all their domestic income and expenditure, demonstrating just how much money needs to be taken out of the business in order for them to survive.

Poor credit history

When assessing a request for credit facilities from a business, information is obtained from the credit reference agencies on both the business itself and the individual owners of the business.

If the bank is unable to lend to you as a result of information from a credit reference agency, we are not able to share the information directly with you as the information is not ours.

However, you can obtain a copy of your credit record for a fee by contacting the agency concerned. If your credit record contains items that are incorrect, you can apply to have them removed.

Lack of information

Sometimes a business plan is incomplete or lacking in important details - if the bank cannot see how the business is going to operate, or the plan doesn't contain a complete business plan and forecasts, it will be impossible to agree the lending.

If you know of any issues that could cause the bank concern, discuss them at an early stage and provide supporting information to help put your case across.

Lenders need to understand your ability to provide enough income to live on and service any borrowings they have, particularly in the early years.

It is therefore important that you provide a summary of all your domestic income and expenditure, demonstrating just how much money needs to be taken out of the business in order for you to survive.

Understand the figures

We see many examples of franchisees simply presenting figures given to them by their franchisor, without really understanding what they mean.

As franchisors it is essential that you encourage your prospective franchisees to take ownership of their figures, particularly the cash flow forecast. If they are unable to explain these to the lender in a convincing fashion, it's likely they will be turned down for the finance they need to get their business off the ground.

It's not just a cash flow forecast

In contrast to the above, we are sometimes presented with a cash flow forecast and little else. The bank won't just focus solely on figures.

The business plan needs to demonstrate that the franchisee has fully researched the local competition and that they understand their market etc. Whilst the cash flow forecast tells a lender what will happen, the business plan explains how it will be achieved.

It's not just about the franchisee

With over 800 franchises active in the UK it can be a mistake to assume that the lending manager knows all about every single franchise, although the specialist franchise units minimise this risk.

It is therefore helpful that when the franchisee presents their business plan they explain exactly what help they will be receiving and the track record of the franchised business.

Whilst the majority of business plans we receive are perfectly adequate, we hope these few pointers will help make it easier for you to obtain the finance you need.

About the author: Cathryn Hayes, Franchise Director at Revive! Auto Innovations, has over 20 years’ experience in franchising, formerly as Head of Franchising at HSBC and more recently as British Franchise Association (bfa) Head of Business Support.