In a recent piece for Independent.ie, Donal O'Donovan spoke to Brian Lucey of Trinity College, one of the authors of a paper called 'Discouraged Borrowers: Evidence for Eurozone SMEs'...
The article indentifies 'fear of rejection' as a major factor in discouraging borrowing by SMEs. In Ireland, 44pc of businesses surveyed gave 'fear of rejection' as their primary reason for non-application.
This is understandable. The economic realities of the last decade have caused a lot of business owners to become disillusioned with the traditional financial system.
Lack of funding to SMEs has been a constantly recurring theme in recent times, so the fact that a lot of good businesses don't even bother applying for loans should not come as a surprise.
Personally, I don't think that Irish SMEs are 'too gloomy'. It's more a case that they have become justifiably conditioned to believe that the whole process might be a waste of time. For years, we've been hearing about the rejections and how hard it is for SMEs to access finance.
Even though the reality might now be different, that negativity has created a lasting impression.
While it may be understanable, this reluctance to seek finance is still a worry and something that needs to be tackled.
An adequate supply of capital to good businesses is a key driver of economic activity. SMEs are the backbone of the economy. It is vital that we, in the business of lending to SMEs, work to address this negativity and educate business owners about the various options they have in securing the funds they need to grow their businesses.
Self-selection is not always a bad thing. If a business owner knows that they are likely to be rejected, it might make sense to save themselves the time and hassle that can be associated with applying for a business loan. This is particularly true when the application process requires the creation of a business plan or a set of long-term cashflow projections.
The figures, however, show that there are a lot of businesses with good credit prospects still reluctant to apply for business loans out of 'fear of rejection'. I believe there are 3 simple ways that we can tackle this mindset.
1. Make Applying Easy
One way that we can alleviate these concerns and encourage more business owners to seek the funds they need to grow, is to make application processes as painless and hassle free as possible.
If a 'time poor' business owner knows that they don't need to invest hours of work just to get an answer, the 'fear of rejection' becomes less of a concern.
With Linked Finance you can apply for business loans online in just 2 minutes.
2, Communicate Clearly
If we communicate clearly about the criteria we look for as part of the credit approval process, business owners will have a better understanding of their prospects before submitting an application.
At Linked Finance, we look for businesses that have been trading 2 years and have an annual turnover of €100,000 or more. The only documentation you need are your last filed accounts and 6 months bank statements.
3. Educate About the Options
Finally, we need to make business owners aware that the financial landscape has changed drastically in recent years. Business owners now have a much wider array of options when it comes to financing growth.
Technology and the inadequecies of the traditional banking system have given rise to a whole new generation of finance providers and products that can help SMEs. These days SME owners aren't limited to the 'one-stop-shop' model offered by the pillar banks. Now there are a whole host of alternative finance providers who specialise in offering specific financial products that are tailored to the needs of Irish SMEs.
Business owners now have access to peer-to-peer lending, crowdfunding, factoring, invoice discounting, asset finance, purchase order finance as well as a range of state supports and grants geared toward helping Irish SMEs to grow.
The onus is on us to educate business owners about these options, making sure that we are clear about the criteria we use when evaluating applications and ensuring that the application process is as painless as possible.
Implementing these three simple steps should go a long way toward engouraging 'discouraged' borrowers to overcome their 'fear of rejection' and seek the funds they need to take their businesses to the next level.