Once you have identified the type of lending your business needs, it’s time to apply for it. This can be a stressful process, but it doesn’t need to be. Here are our top tips to making your business more attractive to lenders.
Perfect Your Business Plan
When it comes to traditional lending, banks will want to understand your business plan fully before agreeing to lend you money. You want to ensure your plan is professional, well written and inspires the lender to believe in your business. This means being able to show where your business is heading, a marketing strategy and tangible, realistic financial forecasts.
It is also important not to shy away from acknowledging the commercial risks you face. All businesses, either small or large, are exposed to risks as well as opportunities. By identifying both as part of your business plan, you will be inspiring confidence in the lender that you are a trustworthy and informed business owner and that your business plan is robust.
In addition to your business plan, banks will want to see other supporting documents. These include business license, partnership agreements, financial statements and tax returns.
Your financial history is important, so whether you are a new business or have been going for a while, it is crucial that all of your accounts are well maintained and consistent across the board. Make sure you have been consistent with your filing, creating formal accounts and that your income tax is up to date and matches the figures on your management accounts. Discrepancies or inconsistencies can create a lack of trust, which could give the bank cause to refuse the loan.
Before applying for a loan you should ensure all of your business documents are consistent, organised and where possible collated in to a report. That way you can understand your business’s finances inside and out and can answer any questions from the bank quickly and confidently.
Know Your Numbers
This may seem obvious, but the banks will expect you to know exactly what money you need to borrow, where it will be invested and how you are going to pay it back. Some business owners approach lenders without having a clear idea of the figure they are going to ask for, which can result in them either leaving with a loan too small to make a real difference to their business, or nothing at all. A lack of financial knowledge can really discourage banks from lending you money.
When approaching a traditional lender you should be able to clearly demonstrate that you have considered all factors that could affect your cash flow and that you have factored repaying this loan in to that. To do this, use sales projections to work out how much you will earn over the course of the loan, and by subtracting expenses and overheads from this, will be able come up with a budget for your monthly repayment.
Improve Your Credit Score
Having a poor credit score, both professionally and personally, can affect your chances of securing traditional lending. One of the simplest ways to ensure your credit score is attractive is to pay bills on time. Paying your bills before their due date is not only good business practice, but it will keep your credit score high and also maintain good relationships with your creditors and suppliers. Another way of improving your credit score is to take out a business credit card with a small overdraft and make regular monthly payments – clearing the overdraft where possible. This will show you are not only a responsible lendee, but that you have the funds available to pay off your debts.
You should regularly check your credit score so you are aware of any changes and keep an eye out for any mistakes on your profile. Something as simple as a wrong address can have a dramatic effect on your credit score, so make sure all of your information is correct and up to date. If you do have a bad credit score, it is probably best to hold off on applying for a bank loan until it is looking healthier, as every rejection can reduce your credit score even more.
Reduce Your Financial Risks
One way of reducing the financial risk for both your company and lenders is to create a cash reserve. A cash reserve is savings that can be used in emergencies, when funds are unexpectedly low but you have outgoings that need to be honored. For banks, this gives them the security that even if you have short terms cash flow issues, you will be able to keep up with your regular repayments.
Keeping your overheads low will also make you more appealing to banks, as it reduces the risk and increases your profit margins – which is always a good thing in the eyes of a lender. Simple changes to your business such as going paperless, reviewing your utility suppliers and rethinking your employee benefits system can all have a huge effect on your outgoings.