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Making a business loan application can seem a daunting task, however with the right preparation for each stage of the process, it needn’t be as intimidating as you would expect.
After all, banks do want to lend to businesses providing they can show that they are a good prospect. Lending to businesses is very viable and profitable for banks, so it’s important to remember that they are not simply doing you a favour.
However, this doesn’t mean that applying for a business loan is easy. It’s a lot of hard work and requires effort and diligence to ensure that you obtain the right deal for your company.
Once you have determined that a business loan is the right route for your business, you need to demonstrate that your business is a viable proposition and a ‘safe bet’ for the bank to invest in.
The useful evaluation of the loan process and tips below, will enable you better understand the process of applying for a business loan and what to bear in mind to successfully secure finance for your flourishing business:
Understanding the loan application process
In simple terms, there are usually four steps to a loan application:
- Completion of an application form either online or in person, which will include attaching the necessary documentation as required by the lender.
- You may also be invited to attend an interview where you’ll be asked to talk about your business plans.
- The lender will run a credit check to establish your credit worthiness, most likely on your business and personal accounts.
- The lender will establish whether to offer you a loan and will confirm their decision with all proposed terms, such as the applicable interest rate, the confirmed loan agreed and any other relevant terms.
- Should your application be successful, you can decide whether to accept the loan.
When applying for a loan, you want to give yourself the best chances of approval. Here are 8 top tips to ensure that you're on the right track.
1. Ensure that you have gathered all relevant information prior to applying
Lenders vary in their loan requirements, however it is advisable to be well prepared and to collate the following prior to making a business loan application. We also would recommend that you speak to a bank manager first or check on specific loan application details prior to making an application. Examples of documents that may be required include:
- A business plan which details how your company plans to repay the loan.
- A cashflow forecast showing projections of incoming or outgoing cash flows of the business every month.
- Details of your business assets and liabilities, including all income from any other sources.
- Monthly bank statements.
- Financial accounts going back several years showing profit and loss, balance sheet and cash flow statements.
- Management accounts demonstrating the overall health of the business.
- Company documents including Companies House registration, shareholder and directors’ details and proof of address and ID documents.
- Your personal details
If you’re applying for a loan as a result of the covid-19 pandemic, additional lending criteria may be required, such as proof of how your business has been affected by Covid-19.
2. Know everything about your business
From a lender’s perspective, it’s a massive alarm bell when a business owner or manager stumbles on straightforward questions relating to their business. It’s like trying to sell someone a holiday without telling them the holiday destination and hotel they will be staying at and how to get there.
Convincing someone to invest in your business is a hard task as they have little or no tangible proof of your future projections and investing in you is at their risk. You should feel comfortable and confident in explaining all aspects of your business, including its past performance, present challenges, and plans for the future, ideally in an engaging manner, so always come prepared.
3. Keep all records up to date
We know that time management for small businesses is a challenging task, but when a lender is assessing your business loan application, they will expect to receive your latest records, such as bank statements, statutory and management accounts, proof of revenues, contracts and any of the documents as mentioned above. Therefore, it’s essential that you keep your records in an organised format and produce the latest copies of any documentation to be provided quickly and in a professional, easy to access format.
In your effort to keep all records up to date and orderly, various cloud accounting software applications are available in the market, that can assist you in managing your records effectively at very competitive rates.
It’s important that you set strict reporting deadlines, either weekly or monthly and stick to them – as there’s nothing worse than trying to consolidate figures that aren't fresh in your mind. If this sounds like hard work, then I suggest you hire a professional accountant to handle such matters and keep your business organised.
4. Communicate openly and honestly in all that you do
Once you've selected your lender and submitted your application, ensure that you handle ongoing communication with them as a top priority. Respond in a prompt and timely manner and manage expectations of any documentation that you're preparing.
The discipline with which you handle your application process is often deemed as indicative of your repayment discipline, so making a good impression is of paramount importance. Remember that no lender will lend to a business where there are many questions left unanswered in their application process.
5. Clearly demonstrate how you intend to use your loan
You need to be able to clearly demonstrate the direction for your business, and exactly how the bank loan will assist you in reaching your business goals. This can be demonstrated through a well-prepared business plan that shows how all monies will be spent and your expectations in return.
Always aim to keep your plans realistic. It’s not about impressing your bank manager, but moreover demonstrating that there will be a return on investment. Having an orderly, clear and concise business plan will always help achieve optimum result.
6. Demonstrate your business’s ability to pay
Any bank looking to lend money will seek the reassurance that you will have the ability to repay your loan, therefore will want to see details of your cash flow and profit forecasts. To maximise your chances of getting the loan, these will need to clearly demonstrate how your business is forecasted to grow. We recommend that you seek help from a trusted accountant, so as to help present your figures in the most favourable, appropriate and compelling way.
The bank will also seek to establish what experience you have in your sector, and the management team you have to support you and your business. It’s important that you demonstrate that your company invests in training of its personnel and that your business has a long term vision and values. This instils confidence in the bank, that they are lending to a business who know what they’re doing and who is professional with all fundamental traits required for growth.
7. Aim to remove or reduce bank risk
Lending money is profitable to banks, yet fraught in risk. The costs of debt repayments from defaulters are high (especially during tough current economic times). The more you can eliminate the risk from the bank, the easier it will be to get the loan, and possibly even with more preferential terms.
There are several ways of doing this. The first is to offer security – this is usually something you will lose if you cannot repay the loan. New businesses that have no assets, may find it more difficult, as banks will usually not accept loan terms without security. Some lenders may ask for personal security such as your house, this is normally the case with government backed loans, where your loan application is above a certain limit, requiring you to give personal security.
Another way of reducing the risk to banks is by obtaining business insurance. From personal experience most banks will require proof of a business insurance being in place prior to lending. This would mean that if the unforeseen happens in your business, then at least some of the costs can be recovered from the insurance policy.
An alternative way to reduce bank risk is also by raising equity. This option enables you to demonstrate good faith to the bank by loaning your own money to the business, as well as adding confidence in your ability to repay the loan. This could involve you lending £1 for every £1 or £2 the bank lends.
8. Build a good credit score
Your credit score has a huge impact on your loan application whether it be a personal or business application and will impact its success. Banks often like to see some proof that you’ve borrowed money before, and have repaid it back on time, ensuring that any existing repayments have been met on time. Always bear in mind that any late or missed payments can negatively impact your credit rating.
The higher your credit score the more likely your loan application is to be accepted, and the better terms you’ll receive. Loan providers reserve their best deals for those with excellent credit ratings. If your score is low, consider rebuilding your credit rating before applying for a loan.
Getting yourself on the electoral register gives lenders a way of checking your personal details and address history. They need this information to confirm you are who you say you are prior to lending you any money.
You can use a credit score services such as Experian to stay on top of any changes to your credit rating and find ways to improve your score.
Lynn Lin is Chartered management accountant and ATT qualified tax advisor, and partner at Gerald Edelman she has assisted many start-ups and growing businesses in obtaining debt financing. During Covid-19, she also assisted several businesses in obtaining CBILs loans, on average over £0.5m.
Lynn has extensive experience in business plan preparation and financial modelling, and is often a guest speaker, regularly lecturing on loans and financing services at various universities around the UK and to various large organisations in the UK and worldwide.
For further information on loans and debt financing contact Lynn Lin or one of our experts today.