When your business needs a loan, it can sometimes be difficult to know where to turn.
Moreover, the seemingly endless requirements and eligibility criteria can leave you feeling like you are navigating a maze.
To help give you the best chance for success with your business loan application, our expert business managers, Jordan Berg and Nicola Mapp, share practical information and top tips to help you secure the funding your business needs.
It’s worth mentioning, however, that there are many different types of finance available that all serve different purposes. Your bank, accountant, local growth hub or finance broker can give you further advice on which type of finance is right for your business.
Online directories such as British Business Bank’s Finance Hub include in-depth information on the types of finance available and how they can help you to grow your business.
Why might you need finance?
Finance traditionally fuels growth by allowing businesses to invest in assets, people and systems to improve its future profitability. Due to the current circumstances, many of those who were traditionally growth-orientated businesses have been taking advantage of the government initiatives to assist with their working capital.
With the “new normal” transition upon us, it is time to consider various factors in relation to your finance needs:
- The future of your sector and how you can pivot your business to maintain and/or create new revenue streams. For the most successful business owners, this drastic change can be the catalyst to expand their market share and customer base.
- Under government restrictions – will your revenue be temporarily impacted? Will this affect your day-to-day cash?
- Are you well equipped digitally to open and increase online revenue streams? Have you considered your obstacles to growth? Would new equipment/machinery increase your capacity and ability to service more customers?
These are all common reasons why businesses may borrow, but any reason to grow or sustain your business is a reason you may want to speak to a lender.
Defining your need
Before you begin the application process, consider why your business needs this funding – you will need to clearly articulate how this finance will be used to support the business.
You then need to decide how much to apply for.
This can often be a challenge – the circle of thought “is that too much?” “will that do?” “but what if this happens?”. The overall message is to be specific, calculate what you can and add a small contingency.
For example, if the scenario is to invest in equipment to stimulate growth, research what equipment you may need and be realistic with the costs. Total all the costs and any associated costs of operating at increased capacity e.g. utilities, staff and other considerations that may be specific to your sector.
Determine what is affordable
So you’ve reached your figure, now what? Before applying for finance, it’s worth taking time to consider what’s realistic and affordable.
For business loans, consider your debt service coverage (DSC). This is a handy behind the scenes calculation which loan assessors will be judging you on. It totals what money is left in the business to make debt repayments annually.
Calculations can vary but the most simplistic formula would be:
Profit before tax / total of 12 months repayments
This provides a debt service cover multiple – how many times the business can service debt repayments.
For example, if your business makes £50,000 profit per annum, you wouldn’t want your annual repayments to exceed this figure. If you can structure the loan over a longer term, annual repayment totals go down and the debt service coverage multiple will increase. This reduces the stress to your business when making repayments and increases the chances of a positive lending decision.
The DSC ratio is “good to know” to check you’re in the right ballpark – but do not get too hung up on this.
Some lenders will have minimum figure for DSC, and this will vary between lenders, sectors and size of the business or loan facility. It might be worth discussing this with your lender ahead of your application - most lenders are happy to have an open affordability conversation with you.
Putting together your application
The majority of delays are caused by incomplete documentation. To strengthen your application, have the relevant information ready in advance.
A good starting point would be;
- Accounts – last 3 years of full accounts
- Management Information – Ideally this will cover the period from your last annual accounts up until the time of your application.
- Cashflow – a detailed forecast that covers a minimum period of 12 months.
- 6 months Business Bank statements
Decisions are based on trust and whilst it may be appealing to conceal any detrimental information to a lender, this is really counter intuitive. We would recommend being up front and honest should there be any irregularities in your financials or any challenges the business has faced.
Did the business make a loss one year?
Do you have a poor personal credit score?
Has the business had any bad debts?
These sorts of issues are best flagged ahead of time with an explanation as to why it happened and what steps have been taken to avoid it happening again.
It’s better for a lender to have too much information than too little – you want to make it easy for the lender to say yes!
How will I be judged?
Here are a few things that lenders will consider:
- Business stability and track record of profitability.
- The impact generated by the funding.
- Serviceability - how many times your annual operating profit can make annual repayment totals.
- Creditworthiness - don’t forget to check your own credit report – this provides an indicator as to how you manage your own affairs – it is always worth a check to avoid any surprises.
What to expect from the process
The process can vary from lender to lender. When further information is requested be prompt and cooperative. Seek timescales where possible – it’s been an incredibly busy time for lenders, so ensure there is nothing outstanding your side that could hold up the application.
If you are declined, ask why. This will support you with future requests and help you to understand your weaknesses through the eyes of a lender.
How Can SWIG Finance Help?
SWIG Finance is the South West’s leading Community Development Financial Institution (CDFI).
As a CDFI, we take a personal approach to lending and our decisions are made by people, not computers, this means that we lend by looking at the bigger picture.
It also means that we can often lend when others can’t.
For more information about our services, please visit www.swigfinance.co.uk.