If you're
thinking of applying for a bank loan, forget all the doom and gloom. There's a
fundamental principle to remember: banks still want to lend money to viable
businesses. If you can demonstrate your business can generate enough profit to
prosper and then pay them back, you're good to go. The challenge is to prove
you fit the bill: this can be difficult if you have no track record to
point to.
This
guide explains the dos and don'ts of applying for a business loan.
Are you ready?
- Whether you're a start-up or not make sure your business is ready for investment.
- Ensure you have reached the point where to expand your business - or to get it wholly off the ground - the logical option is to bring investment in from outside.
- Don't wait until you're in a bad spot and desperately need finance before you apply: the average lead time is three to six months.
Before you approach the bank
- Read up on how to write a business plan and how to make cash flow forecasts.
- Research all of the business fiance options open to you, such as a personal loans, small business grants or private equity.
- Look into your local SME financing scheme to see if you're eligible.
What to do first
- Prepare to outline in your pitch exactly how much money you need and how you will spend it. You need to be able todemonstrate how this cash injection will benefit your business.
- You'll need to present a credible business plan and be able to speak in depth about your business's commercial offering
- If you feel you need help on your business plan, you might consider consulting a business adviser.
- Be ready to provide monthly cash flow projections for the next four quarters to demonstrate you can comfortably meet interest and loan payments. Include a 'repayments' figure in your calculations.
- Know all details regarding the activities of the company: the more you're asking for, the more detail you'll be expected to give
- Get ready to detail any market research you have carried out
You have to show the bank that you have great people on your team with the right balance of skills and experience, so get ready to convince the bank you're the real deal. - Be energetic and enthusiastic; but be honest too. You can mention weaknesses as well as strengths in your pitch. The bank will need a true picture of your business.
- Have all documents to hand so that you are able to furnish the bank with up-to-date personal and business financial histories: you'll need to provide an acceptable credit score or personal reference, and to go through your latest accounts, tax returns, assets and liability statements
What to expect
- There are three questions the bank will ask:
- How much money you need; i.e. do you need to borrow the full amount or do you have a deposit?
- Over what length of time do you want to repay your loan?
- Can you secure the debt against any assets?
- The answer to these questions will influence whether your application is accepted as well as determining the rate and cost of your interest: so get your figures ready
- The larger your business loan, the more detail you will have to provide
Types of loan available
- High street banks, building societies, specialist lenders and internet brokers offer loans tailored to the needs of small businesses. There are two main kinds of small business loan:
- Flexible loans are tailored to your business needs, and may allow a capped or variable interest rate and a choice of monthly or quarterly repayments
- Fixed loans have a pre-determined rate of interest and a more rigid repayment structure
- The interest rate offered on your loan will vary depending on fluctuations of the base rate, on the duration of your loan and on the risk involved. Rates generally range from around 8% to 12%
- Depending on the size of your loan - small business loans generally range from £1,000 to £25,000 over an average of one to 10 or even 15 years - you may or may not have to provide security.
- Unsecured loans usually have higher rates of interest and tend to provide smaller sums of money over a short period of time
- For larger loans, a bank will want to secure the loan against an asset such as a business property, or it will require personal guarantees - on personal homes, for instance - from company directors
- You can ask to limit the scope and duration of your personal guarantee i.e. you can be released from personal guarantee once cashflow reaches a certain level, or after a set period of time
- Depending on the asset you are using for security - freehold and long lease property is the most valuable -- the bank will usually lend 50% - 80% of a property's value. Specialist lenders may advance as much as 90%
- Beyond this, loans are differentiated by size and term
- Short term loans are usually smaller and repaid within one year
- Longer term loans are those which take longer than one year to settle - and can take as long as 20 years to mature, like mortgages.
- Credit cards, lines of credit and letters of credit are also worth considering, depending on your circumstances
- Remember: sole traders and partners are automatically liable for their company's debts
Be realistic
- Be prepared to wait a little before your loan is approved: the average lead time is three to six months
- Don't underestimate how much money you will need. If you need to return to the bank and request further funds, it will be more expensive. It may also affect the lender's confidence in your ability to manage your company finances.
- Don't over-forecast revenues or under-value the costs you will incur.
- Be honest about any reasonable living costs you will need to take out of the business.
Do your homework
- It's a good idea to ask the bank to calculate the total cost of your loan offer, including the total cost of interest and all charges: this will make it easier to compare different offers
- Be sure to check around and compare different banks and their small business offerings. Your bank may be willing to improve its offer if you have other quotes.
- Many banks prefer if you have your main account with them, but if you do not hold an account with them it will not necessarily count against you.
- Check for hidden charges:
- You can be charged for simply setting up a loan agreement with the bank
- Ask about late payment charges
- Redemption penalties can apply if you choose to settle your loan earlier than agreed
- 'Add on' fees: ask your bank if these could apply to you
Checklist
- Have you gathered sufficient evidence to prove you can generate profit and make repayments on time?
- Ensure you can outline what you need money for and how you will pay it back
- Identify clear routes to market and when you expect to start bringing money in
- It's crucial you have a contingency plan so you can repay your debts even if things go wrong