By Neil Cassule, above, Chief Commercial Officer and Co-Founder, FundOnion
SMEs form the backbone of the UK economy, in fact they account for 99% of all private sector businesses, contributing significantly to innovation, employment, and economic growth. One critical aspect that fuels the growth and success of these businesses is access to finance. Securing this finance, however, remains a challenge for many, whether it be for growth, working capital, or consolidation.
There are a myriad of different factors to consider if, as a business owner or decision maker, you are considering applying for finance from a lender, conventional or alternative. Some of this advice applies to the point of need while some is better to consider ahead of time.
Maintain a healthy credit profile
Lenders often scrutinise the personal credit profiles of directors when assessing the creditworthiness of SMEs. Maintaining a healthy personal credit score is crucial, as it reflects the individual’s financial responsibility. Directors should regularly check their credit reports, address any inaccuracies promptly, and take steps to improve their credit score if needed. Timely payments on personal debts, such as mortgages and credit cards, contribute positively to credit profiles, but other, quicker fixes can also count, such as being currently registered on the electoral roll.
Showcase your healthy business
The financial health of the SME looking to borrow money is obviously one of the most important aspects to consider. A consistent and growing turnover indicates a healthy business, making it more attractive to lenders, so think about timing when applying for finance. If your business is cyclical and you know December is traditionally a slow month, January might not be the best time for an application. Of course, that ability to be selective with timing can be a luxury, but it is something to consider ahead of time, where possible. Similarly, if you know March is your slowest month, an application in February could be a prudent way to get through it or focus on growth.
Good accounting is important
Providing accurate and up-to-date financial statements is essential for lenders to evaluate the business’s financial stability, so good accounting is important.
Lenders closely examine bank statements to assess if the business can afford to service the loan they are applying for, so be realistic about what you can afford and what you can’t. It is also helpful to think about cash balances at the end of the month ahead of the application. If you are making a choice between a discretionary business purchase and a healthy bank balance on 31 January, it can pay to hold onto the cash.
Maintaining a healthy cash flow is crucial, as it demonstrates the ability to meet financial obligations, across a long period of time. Regularly reconciling accounts, minimising overdrafts, and avoiding bounced payments are practices that positively influence serviceability within bank statements.
Existing debt commitments
The existing debt commitments of SMEs are an important part of any decision on their creditworthiness, both positively and negatively. For those businesses who have previously borrowed money, a history of managing debt responsibly and keeping debt-to-equity ratios in check is vital for securing further finance. SMEs should communicate transparently with lenders about existing liabilities and have a clear strategy for managing debt. Demonstrating a proactive approach to debt management enhances the likelihood of securing additional financing.
Homeownership can provide additional security
While not always a decisive factor, being a homeowner can positively influence a lender’s perception of stability and commitment. Homeownership may provide additional security for the business, making it more attractive to lenders. SMEs should be prepared to provide information about directorial homeownership status and any collateral that can be offered to secure financing.
This does not always mean that the home is involved in the loan as collateral, although this can be an option that often improves acceptance rates and interest offered on the loan. However, it is easy to understand that this is an option which is either impossible or unpalatable for some business owners.
Your track record as a business leader
Lenders may consider the director’s track record, including any history of failed businesses or involvement in Individual Voluntary Arrangements (IVA), Company Voluntary Arrangements (CVA), or liquidations. Directors should be transparent about past business experiences and provide explanations for any failures. Presenting a comprehensive plan for learning from past mistakes and ensuring the success of the current venture can mitigate concerns.
Your trading history
A well-established trading history adds credibility to any SME. Lenders often prefer businesses with a proven track record of successful operations stretching back years. This is clearly not something that can be improved overnight, but SMEs should highlight their trading history, showcasing achievements, growth, and the ability to adapt to market dynamics.
Securing finance in 2024 requires a holistic approach that addresses various aspects of the business and its directors, as well as potentially talking to and comparing multiple lenders to find the one that works for your business.
Transparency, proactive financial management, and a commitment to learning from past experiences are key elements in building trust with lenders and unlocking the doors to financing opportunities.