Getting a business loan can be the make or break moment for many business owners.
While most business owners focus on perfecting their financials and polishing their bank loan business plans (which are both important by the way), there’s an often overlooked part of the loan approval process that can make a big difference as well – psychology.
In this article, I’ll cover the sometimes secret psychological factors that play a big part in business loan approvals in Australia.
By understanding these subtle but powerful influences, you can position your business, and yourself, in the best way possible to secure business funding.
First Impressions
You might think every loan application gets an equal go, and that it’s only about the numbers. But the reality is that first impressions count, even in the supposedly objective world of finance.
A business psychology expert at the University of Melbourne explainsed, “Loan officers, like all humans, form rapid initial judgments. These instant decisions can colour their perception throughout the entire business loan process.”
This is why it’s so important to make a good first impression. Here are a few tips on how to do this:
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Be prepared, but not too keen: We know Australians like to be laid back. But punctuality and preparation are key. Be engaging, but avoid being too eager or aggressive.
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Learn to small talk: A bit of chat about the weekend’s AFL game or the weather can help build rapport before getting into business.
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Dress to impress: While Australia’s business culture is generally less formal than some countries, dress professionally for bank meetings.
The Halo Effect
The halo effect, where positive impressions in one area influence overall perception, is alive and well in Australian business lending.
For example a Sydney based fintech startup found that mentioning they were part of the prestigious technology start-up accelerator program improved their loan terms even though it had no direct impact on their financials.
To use the halo effect:
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Mention any awards or recognition your business has received, even if they’re not finance related.
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Highlight partnerships or collaborations with well known Australian brands or institutions, or the experience of your business finance broker.
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If you’ve been featured in Australian media such as The Australian Financial Review or ABC News make sure to mention it.
Cognitive Biases in Loan Decisions
Even the most experienced loan officers are not immune to cognitive biases. By understanding these you can navigate the loan application process better.
Confirmation Bias
Loan officers may unconsciously seek information that confirms their initial opinion of your application. If they start with a positive view they may focus more on your strengths and downplay your weaknesses.
To combat negative confirmation bias:
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Address potential issues in your application upfront.
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Give a balanced view of your business, acknowledge the challenges but highlight the solutions.
Availability Bias
Recent events or trends in the Australian economy can have a disproportionate impact on loan decisions. For example after the 2019-2020 bushfires many banks became more cautious lending to businesses in affected areas even if the business itself wasn’t directly impacted.
To overcome availability bias:
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Stay up to date with current economic trends and how they might impact lenders.
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If applicable explain how your business has adjusted to recent challenges or economic changes.
Anchoring
The initial loan amount you request becomes the anchor for the negotiation. Australian banks, like the Big Four (Commonwealth Bank, Westpac, ANZ, NAB) use this as a starting point for the conversation.
Tip: Try to start with a slightly higher loan request than you need so you have room to negotiate and still get the funds you require. It’s easier to move the ‘ask’ down rather than ‘up’.
Emotion in “Objective” Decisions
While Australians like to think of themselves as no-nonsense, emotion still plays a big part in loan decisions. Your passion and confidence as a business owner can be powerful.
Nadine Connell of Smart Business Plans says “I’ve seen applications with good numbers get rejected because the owner couldn’t articulate their vision. I’ve championed loans for businesses with less than perfect numbers because the owner’s passion and deep understanding of their market was evident.”
To show your passion:
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Rehearse your pitch to get the right balance of enthusiasm and professionalism.
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Use storytelling to make your business vision stick (more on this later).
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Be prepared to answer tough questions with confidence, you’ve thought through all the scenarios.
Social Proof and Its Impact
In Australia’s small business communities who you know is as important as what you know. Social proof – evidence that others endorse your business – can have a big impact on loan officers.
Ways to use social proof in Australia:
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Get testimonials from well known Australian entrepreneurs or industry leaders.
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Show partnerships with Australian institutions or companies.
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Demonstrate community support especially for businesses in regional areas.
The Paradox of Choice in Loan Applications
While it might seem logical to present multiple business plans or scenarios to a bank, this can actually work against you. The paradox of choice suggests that too many options can lead to decision paralysis or poor choices.
To not overwhelm loan officers:
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Present a single, clear business plan with one scenario.
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If you must present alternatives, limit to 2-3 and clearly explain the pros and cons of each.
Reciprocity and Relationship Building
In Australia’s relationship based business culture building a relationship with your bank before you need a loan can be priceless. The principle of reciprocity suggests people will help those who have helped them.
Tips for building bank relationships:
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Keep your bank manager up to date with your business’s progress even when you don’t need a loan.
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Use other bank services like business transaction accounts or merchant services.
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Attend bank run events or workshops to meet bank staff and other business owners.
Storytelling
Australians love a good yarn and this applies to business too. A good story about your business can be as important as the numbers in a loan decision.
Elements of a business story for Australian audiences:
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Any uniquely Australian aspects of your business or personal journey.
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Show resilience and ability to overcome challenges, a big part of the Australian culture.
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If relevant, how your business contributes to the local community or addresses Australian specific problems.
Overcoming Unconscious Biases
As Australia becomes more diverse banks are becoming more aware of unconscious biases in lending. But they still exist.
Strategies to navigate biases:
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If you’re from a traditionally underrepresented group in Australian business, consider how your diverse perspective benefits your business model.
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Look for banks or loan officers who are practicing diverse lending.
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Be prepared to provide extra context or explanation for any part of your business that’s not well known to mainstream Australian lenders.
Non Verbal Communication
In face to face meetings which are still common for big loan applications in Australia non verbal cues play a big part. Australian culture values direct eye contact, firm handshake and open body language.
Tips for non verbal communication:
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Make eye contact but don’t stare – Australians like a balance.
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Use open gestures and don’t cross your arms which can be seen as defensive.
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Mirror the loan officer’s tone and energy to build rapport subtly.
Timing and the Economic Climate
The timing of your loan application can make a big difference. Australian banks’ risk appetite changes with economic conditions and regulatory changes.
For example, after the 2019 Banking Royal Commission many Australian banks tightened their lending criteria. During the COVID-19 pandemic government backed loan schemes made banks more willing to lend to small business.
To use timing:
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Stay up to date with the current lending landscape in Australia.
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If you can time your application to coincide with good economic conditions or government initiatives.
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Be prepared to explain how your business plans fit or are resilient to current economic trends.
Conclusion: The Human Side of Lending
While financials and business plans are important, understanding the human factors in lending can give Australian business owners an advantage. By considering these often overlooked human elements you can build a better business loan application and increase your chances of success.
Ultimately lending is about trust. By covering both the rational and emotional parts of your business case you’ll build confidence with loan officers and get the funding your business needs to succeed in the Australian market.
When you next apply for a bank loan take the time to think about these factors. It could be the difference between a yes and a no.
