How banks think about business lending
Banks are, by design, cautious lenders. They lend depositors’ money, are supervised by the Reserve Bank, and have to hold capital against riskier loans. That shapes how they assess small and medium business lending. Parliament’s Finance and Expenditure Committee inquiry into banking competition in 2024 heard a consistent theme from business groups: small businesses often find bank credit hard to get without residential property as security.
None of that means banks are wrong to decline. It means their criteria are built for a particular kind of file, and many sound businesses fall outside it.
The five things banks test
1. Serviceability from financials
The bank wants to see, from your most recent financial statements and tax returns, that the business earns enough to repay the loan with a buffer. It usually looks at two or three years. A loss in the latest year, or accounts that are late, can stop an application.
2. Security
For most small business lending, banks want security over residential property, often the owners’ home. Commercial property and land are taken more cautiously, and security like lifestyle blocks or second-ranking mortgages may not be accepted at all.
3. Credit history
Banks check the business’s and directors’ credit files with the credit reporters. Defaults, judgments, recent insolvency events or lots of recent enquiries can trigger automatic declines.
4. Tax position
IRD arrears are one of the most common reasons we hear for a bank decline. Many banks won’t lend new money to a business that’s behind on GST or PAYE, even when the loan would pay IRD off.
5. Industry and conduct
Some sectors attract tighter rules when conditions are tough, including hospitality, construction and some retail. Banks also look at how your accounts are run: regular overdrawn days, dishonoured payments, and the size and pattern of deposits.
The most common reasons for a decline
| Reason | Why it matters to a bank | What you can do |
|---|---|---|
| Late or missing financials | Nothing to test serviceability against | Catch up, or use a lender that doesn’t need them upfront |
| A loss in the latest year | Fails serviceability | Explain the cause; show current trading |
| IRD arrears | Policy exclusion at many banks | Clear or arrange IRD, or refinance it |
| Defaults or judgments | Credit policy exclusion | Pay, correct, explain; use secured lending |
| New business | No trading history | Property-secured lending |
| Unusual security | Harder to value or sell | Specialist lender |
| Too many recent enquiries | Looks like credit-seeking | Stop applying; target one suitable lender |
What to do after a decline
- Ask for the specific reason and write it down.
- Stop applying elsewhere until you know whether the reason is fixable.
- Get your credit reports from Centrix, Equifax and illion (now part of Experian). See how to read and fix your business credit file.
- Decide: fix, wait or go elsewhere. If the fix is quick, such as filing late accounts, fixing may be best. If the problem is IRD arrears or credit history, a specialist lender is usually faster.
- Prepare what any lender will want. Our guide to what lenders need to see from a business in trouble lists it.
How specialist lenders differ
Specialist, non-bank lenders aren’t bound by the same models. The lending partners we work with, for property-secured business loans:
- start with the property, not the financials, and don’t need financials or tax returns for the initial assessment;
- consider bad credit, defaults and arrears case by case;
- can pay IRD out as part of the loan;
- lend from $20,000 to $1m, as a first or second mortgage;
- can fund within 24 hours of approval in some cases.
Unsecured business loans and lines of credit, for businesses trading six months or more, are assessed on turnover and bank statements, and weaker credit is considered.
The trade-off is cost. Non-bank lending is usually more expensive than a bank loan, and every loan is priced on the individual circumstances. The right comparison is with what happens if you don’t get funded, such as IRD penalties, creditor action, or a formal insolvency process, not with a bank loan you can’t get.
The path back to the bank
Many businesses use specialist lending as a bridge back to the bank. Clear the arrears, keep payments on time, get the accounts filed, then refinance. That’s a plan lenders like to see, and one that often works. If you’ve just been declined, start an enquiry and we’ll talk through where you stand.