Applying for business finance – the professionals guide
Applying for businesses finance is an involved process for both the business and the Lender, potentially requiring a great deal of information for any decision to be made. Delays in supplying the information to the Lender can not only delay the process but ultimately jeopardise it. But a well prepared business can stand a better chance of securing the funding they need and quicker. Every Lender will have a similar process and a similar list of required information. By being prepared and knowledgeable of this puts any business at an advantage. Remember though, it isn’t just a story of facts and figures. The people behind the business are equally important, which is something that is often over looked. The tips below will hopefully help you build a positive ‘story’ around your business and help you highlight all your credentials to the prospective Lender.
Applying for business finance: Where do I start?
Where you start when applying for business finance is dependent on the type of borrowing you need. There are many different types of facilities available and some are a better fit than other. Are you starting a business, buying equipment, funding growth, funding a retraction in business, buying premises or covering short-term or long term cash flow issues? It’s important to know why you need to borrow so that the Lender can offer the right choice of financing solutions. It is always best to speak to a professional adviser if you are unsure as they can recommend the best solution for you and can help guide you through the process.
Applying for business finance: The application – what is needed?
The application to a credit team is where the Lender formally analyses your business and will ultimately decide on whether you are a good risk to lend the money to.
There is generally a specific set of questions that need answering and a standard suite of documents that the Lender will require. Having these prepared in advance will help maximise the chances of your application being successful.
- Purpose of lending – What do you need to borrow the money for?
- Amount – It may be obvious but how much you need to borrow?
- Lending term – If it is term debt (i.e. a property loan) how long do you want to repay the loan over?
- About your business now – What does your business do; how do they do it; who are the key individuals; what are the key individuals experience/background?
- About your business in the future – What are your plans? What are the opportunities – and also the threats to your business. Why should the Lender buy into/support these plans?
In addition to the above, there are a number of key documents that need to go with an application.
1. Business accounts:
For existing businesses when applying for business finance, the Lender will almost certainly need to see 6-12 months’ bank account statements which they use to assess the conduct on the account. Excesses, returned items and hard core borrowing on an overdraft are examples of poor account conduct.
They will also require your year-end financial accounts covering the last 3 years (it is important to note that the full accounts are needed and not the abbreviated set). They will also want to see up to date management accounts consisting of P&L and Balance Sheet. For larger lends (typically above £500,000 although this does vary) they will also probably want a minimum of 12 months’ financial projections and ideally a Cash Flow Forecast covering the same period. These will give them an idea of past financial performance, how you see the business developing over the next year as well as an idea of future cash flow and the likely impact to your business of changes to costs and income. If you are a new start business financial projections (P&L, Balance Sheet and Cash Flow forecasts) and a supporting business plan are a necessity.
2. Assets and debts (personal and business):
Financially how secure is your business and to a lesser extent how financially secure are you the business owner? These are vitally important questions which any application has to cover off. What does your business own and what does it owe? Details of any property, equipment or existing loans, mortgages, hire purchase or other money owed are vitally important. The Lender needs to check that your business is not over exposed to debt and that you’ll be able to manage the repayments. The Lender can answer these questions for the business by looking at your business accounts and then assess the cash available for servicing the debt- i.e. does your business generate enough cash to make the repayments to the debt?
However, the same questions are pertinent for the business owners as well. An owner saddled with debt with little in the way of equity or security is a higher risk proposition than someone living within their means with some equity in other assets – such as the residential home. It is good practice to prepare an asset and liability statement for all directors and owners of a business and make this available for the Lender.
For most lending options some form of security such as a property, director’s guarantee or other assets is required to secure the funding and the asset and liability statement will evidence this at the outset. If, though, security isn’t available, there are other options such as government-backed and non-bank funds and schemes available.
3. Other considerations
The credit application partly is about building a picture for a credit officer as well. Facts and figures tell some of the story but it also a good idea to expand on some lessor thought about (but no less important) questions: –
Owner investment in business – How committed to your business are you? The Lender won’t want to assume all the risk while you benefit from the proceeds- otherwise why wouldn’t they just do it themselves?! A Lender wants to work with you and likes to see your investment into the business or the new venture – i.e. it shows you have something to lose if it goes wrong which for the Lender is a better position than if you don’t as they can be more confident that will stay the course. If you have made this investment highlight it. It is a major plus point.
Other business interests – What is your experience? Have you got other businesses? If so build a picture of you as a businessman. What do they do? Will they detract from the business the Lender is lending to or compliment it? Will they actually make the Lender more secure if they can take Corporate Guarantees from these entities (note always seek independent legal advice before signing any form of Guarantee). Are they successful? If so highlight this as is reinforces your credentials. Likewise, though if they are not, if they have failed and entered into administration it is absolutely vital that you high light this at the very outset. The Lender will find out about them and without any explanation around events or having any mitigating circumstances presented you risk them making their own minds up. Top Tip – Presenting the Lender with a CV is a quick and easy way of showing your experience.
Applying for business finance: The decision process
Lenders do want to lend to businesses (notwithstanding it is how they make money and hit targets). But they also have a duty of care – to themselves from a risk perspective – but more importantly to you the business. They have to assess whether the lend is affordable both now and also over the coming months and years. A lot of this is subjective and based on assumptions which is why it is important to build that story to get them to buy into you as well as the business.
Typically though the result of the application process will result in 3 potential outcomes: –
1. Awaiting information
This is a common response. No decision has been reached. It simply means that the Credit Officer is still considering the application and has some additional questions based on the information supplied or is lacking some of the key information they require to evaluate the lending application. That’s why it’s important to prepare all information and documentation before starting the process if possible so they have everything we need at the outset. If they do need additional information they should let you know what this is.
This is good news! They will let you know what exactly has been agreed – noting sometimes what is agreed isn’t necessarily what was originally applied for or agreed on any indicative terms that may have been supplied. Assuming you are happy with what is agreed all you will have to do is sign the required paper work. They may also need to work with you to complete any further steps such as taking security if required. Once everything is received and the final checks are done the money will be transferred to your account.
If the Lender has not been able to approve your application, you can request to know the main reason why it has been unsuccessful. There may be a number of reasons why this may be the case and you should discuss it with your point of contact to find out if anything can be done to improve your chances of future success. This is not a personal slight on you (although in the heat of the moment it can feel that way). Rather it is a business decision and like all business relationships some work and some do not. It is important to remember other Lenders may take a different stance or view point. That is why it is always good practise to discuss the decline and fully understand the reasons behind it so you can cover these points just in case they are raised again. If you do not agree with the decline you always have recourse to appeal the decision and the Lender will be able to take you through that process.
Applying for business finance: Checklist
In summary remember that you need to build the whole picture rather than just focussing on what you want. Below is the cheat sheet of top tips for a successful application.
- Where possible always meet the Lender face to face to discuss what you want.
- Before this meeting take time to think about what you want, what your plans are, how the money will be used.
- Be ready to ‘sell’ your business to the Lender’s contact. Key topics you should cover are as follows:-
- What does your business do and how it does it?
- Who are the key individuals – include a breakdown of ownership.
- What are the key individuals experience/background? – preparing a CV for each is a good idea.
- If you have other businesses highlight these describing what they do, how long they have been trading and how successful they are. Remember do not shy away from failed businesses. Be prepared to discuss these and offer mitigation as to why they failed.
- What are your plans for the future?
- What are the opportunities – and also the threats to your business?
- Financially what does this mean – increase in sales/profit or opening of new sales lines?
- Assemble the following documents to provide to the Lender at the meeting: –
- A break down of the corporate structure if applicable.
- 3 years full financial year end accounts (draft accounts for a recent year end are acceptable)
- Up to date management accounts (consisting of profit & loss and balance sheet)
- Financial projections (consisting of profit & loss, balance sheet and cash flow forecasts – for larger lends).
- A business plan if it is a new venture of an existing business or a new start business.
- CV’s of the directors and/or management team involved.
- 6 months bank statements if the Lender is not your incumbent Bank.
- If you sell on credit terms and a copy of an aged debtor and aged creditor report are also useful.
- Provide last filed full accounts for any other business where you are a major shareholder.
- Be prepared to discuss the documents provided. This may sound simple but the Lender will need to understand the information they are being provided with as the application will have to be proposed to Credit on your behalf. Assumed facts and incomplete understanding can cause confusion and potentially negatively affect your chances. This particularly pertains to the financials. Key/common points to discuss are as follows: –
- Year on year sales growth/decline and the reasons for this,
- Reasons for significant gross or net margin increases or decreases,
- Major differences in admin expenses year on year,
- Bad debts and any affect this has had on the business
- Large ‘Other Creditors’ in the notes to the balance sheet,
- Dividend policy and ongoing requirement to draw (as this affects the serviceability of the debt/loan)
- Other debts/ HP loans etc..
- HMRC position—are you up to date or in arrears/ on a repayment plan.
- Working capital movements – such as reducing or extending debtor days, reducing or extending creditor days or large stock movements and the reasons for these.
- If an age debtor or creditor report has been supplied any long overdue debts should be explained
- Relax. Remember the person you meet wants to lend you the money. Use the meeting as a chance to tell your story.