By Graham Toy, CEO, National Association of Commercial Finance Brokers
Whether it’s a marriage proposal, a new job or securing finance to help grow your business, the effect of the word “yes” can be life-changing. But, as a recent survey reveals, SMEs would rather forgo expansion than borrow money from a big bank for fear of rejection. This is part of a trend that’s seeing a growing number of small businesses moving away from more ‘obvious’ routes to finance.
Bank lending to small businesses was flat last year. But asset finance increased 12 per cent and peer-to-peer lending rose 51 per cent, according to the state-owed British Business Bank. What we’ve seen over the last decade is a number of new lenders coming to the market at a pace that is simply unknown.
Now if you’ve been turned down by a traditional lending bank, there are nearly 300 institutions who might talk to you. So how do you give lenders every reason to say “yes”? Well, if securing finance was planned like a wedding or job interview, fewer applications would get turned down.
Follow these ten simple tips and you’ll be exactly the customer the lenders want.
1 Let’s be very clear, no fear…
When you approach a lender, no matter how daunting that might seem, it pays to be very specific about how much you want to borrow and what it is for. There is a quite significant appetite to lend so be one of the lucky ones. If the finance is needed for machinery, a vehicle or working capital expect your proposal to be scrutinised in minute detail.
2 How much have you got?
Before a lender will even consider your plan, they’ll want to know if you’ve got a cash stake or a contribution to the overall cost of your requirement. Have you got “skin in the game”? How much are you prepared to put down? If you ask for £50,000 and have nothing of your own to add you are not taking any risk, it doesn’t work for them. A healthy amount of saved capital will go down well with a lender.
3 Make every (trading) day count..
Gather together your business’ trading information, year-end accounts, profit and loss statement and balance sheets. If you don’t present them to the lender, you can guarantee they’ll ask for them. Show them your last few months bank statements to show how well you run your business. An established SME should make the last three years of trading information available.
4 Know your “right here, right now”
A lender will want information on the current state of the business: your quick figures – the amount you owe and who owes you and when it will be repaid. This will build a picture of the last 12 months and show you have a grip on the business.
5 Have you a financial plan?
What lenders cannot do is loan money willy-nilly to any old Tom, Dick and Harry with a half-baked plan. Prepare a profit budget and cash flow forecast before you sit down with them. If you need working capital it’s very difficult to prove the finance you need without these projections.
6 And are you sticking to the plan like glue?
The lender will want to know how you can repay the loan by studying your financial plan. All lenders will want to be sure that you can afford to repay them. Your financial plan coupled with your historic accounts will help. Also, think about demonstrating how you are performing against plan. A strong financial plan will also indicate your level of ambition. It should be bold and confident without being so optimistic to be thought unrealistic.
7 It’s a numbers game
When it comes to sales figures, if you’re unable to roll these off the tongue, then it’s a demonstration you don’t really understand the business. You should know the minimum level of sales or turnover that you need to achieve to cover your fixed costs? Think about some stress testing scenarios. What if costs rose by as much as 20%?
8 What’s my line?
Expect the lender not to know the first thing about what you do. If you make widgets for living, be prepared to explain your products and services. Tell them all about your market and the competition. If you are the only person doing what you do in an area, explain this and speak with sufficient confidence.
9 Have you cleared security?
The lender may ask for some form of security. So it’s worth thinking in advance what collateral you have to sweeten the deal? If you borrow to buy a vehicle, it will become the security. But you might be asked to sign a Personal Guarantee for the loan, especially if you own a limited company. Have an answer to the question of security in your back pocket in case you’re asked. Carefully consider if you want to provide a guarantee for the full amount and whether you could actually pay up if you had to.
10 I am what I am
Personal integrity is something often overlooked when talking to a lender about business finance. It’s essential to prove you run the same tight ship financially in your personal life as you do in business. Provide the lender with six months of your current account and mortgage statements showing you never go overdrawn or miss repayments. Be honest about liabilities like divorces or school fees and show how you’ve overcome them.
Honesty and openness is very important. Don’t lie or cover anything up because a good lender will find out about it and then you have damaged your reputation. If anyone seeking to borrow money prepares themselves this well, there’s only one probable answer: Yes.