THE ESSENTIAL GUIDE TO APPLYING FOR A BUSINESS LOAN TO APPLY FOR A BUSINESS LOAN

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1 THE ESSENTIAL GUIDE TO APPLYING FOR A BUSINESS LOAN TO APPLY FOR A BUSINESS LOAN 7 TRIED-&-TESTED STEPS

2 CONTENTS Contents 2 So you want to apply for a business loan? 3 STEP 1: Determine whether a loan is the best option 4 STEP 2: Seek the right advice 5 STEP 3: Put your finances in order 6 STEP 4: Create a water-tight business plan 7 STEP 5: Research your borrowing options 8 STEP 6: Compile all the necessary financial information 9 STEP 7: Create your presentation 10 What to do if your application is unsuccessful? 11 What if your business is a start-up? 12 Final thoughts 13 Additional sources of information 14 2

3 SO YOU WANT TO APPLY FOR A BUSINESS LOAN If your small business needs a significant injection of funds, your best option may be to apply for a business loan. The good news is that, despite widespread perceptions to the contrary, banks and other financial institutions are willing to lend. But they will only do so if your business can make a strong and compelling case for deserving financial assistance. This guide has been created to help you build that case. It features 7 tried-andtested steps that you can follow to determine whether a loan is right for your business, choose a lender and put together your loan application. Plus it provides details of additional resources and expertise that you can draw upon at each stage of the application process. We hope you find this guide useful. Remember that you can access additional tips and advice for small business owners at: 3

4 OPTION1 STAGE 1 DETERMINE WHETHER A LOAN IS THE BEST A business loan may well be appropriate if you are seeking long-term finance for one of the following purposes: To buy new equipment To buy a new property To buy additional stock ahead of a busy period of trading To increase your working capital. But there are alternatives Before you start the loan application process, you may also want to consider: Sales financing a way of borrowing against the value of unpaid invoices A business overdraft an option if your borrowing needs are short-term, or if peaks and troughs are a normal part of your business cycle An Enterprise Finance Guarantee (EFG) a possible solution if your business can t offer the security required by a lender for a conventional loan A commercial mortgage a way of releasing equity from a new or existing property. Top Tip: Before applying for a loan, have a chat with your loan manager about the options available to you. The loan manager is your point of contact at the financial institution that will consider your loan application. Good loan managers will be happy to discuss the alternatives with you remember that it s also in their interests to make sure a loan is right for your business. USEFUL RESOURCES For more details about EFGs, visit : 4

5 STAGE 2 SEEK THE APPROPRIATE ADVICE 2 Once you have decided that a business loan is the right option, it s important to seek expert advice. You have taken the first step by downloading this guide. But there are plenty of other resources out there for small businesses. For a start, as we mentioned in STEP 1, you shouldn t overlook the loan manager who will be assessing your loan application. They can help you decide how much you need to borrow on what terms and what information you will need to submit with your application. Plus they will normally be happy to explain what measures you can take to give your loan the best chance of success. Additionally, many financial institutions offer valuable free resources for small businesses on their websites. These often include business planning software and guides on a variety of business topics. USEFUL RESOURCES Advice, tips and information on a variety of topics such as finance and accounting Pressure group that promotes the interests of the self-employed and owners of small firms Community for growing businesses Business support to companies of all shapes and sizes Personalised support for high-growth businesses 5

6 STAGE 3 PUT YOUR FINANCES IN ORDER 3 It goes without saying that when considering your loan application, your loan manager will cast a forensic eye over your business s finances. Here s what they will want to see: Accurate and complete trading accounts A business account that stays in the black and doesn t regularly exceed its credit limit Good credit scores: this applies both to you personally, as the business owner, and your business generally A profitable business your audited accounts are central to demonstrating this and an accountant can help you get them ship-shape. Did you know? You can request your credit reports from credit reporting agencies including Experian. For information and advice on improving your credit score, visit or a similar resource. Top tip There is no doubt that the numbers are vital to your loan application. But they are not everything. Remember that your loan manager will also evaluate you personally for your professionalism and competence. The better you come across, the more likely it is that they will consider you a deserving recipient of a loan. USEFUL RESOURCES The SME Club regularly sends its members top tips from leading professionals on topics related to business finance. To browse the full archive of SME Club tips, visit the Members area at: 6

7 STAGE 4 CREATE A WATER-TIGHT BUSINESS PLAN 4 A comprehensive and compelling business plan is an absolutely essential feature of any viable business loan application. Your plan should explain exactly what your business does, why it is set to succeed, how much money it needs and how it will repay that money in a timely manner. The plan should also substantiate these claims with detailed financial forecasts preferably for a minimum of five years. You may need to enlist the help of a good accountant when putting these together. USEFUL RESOURCES To create a watertight plan for your small business, download The SME Club Guide to Successful Business Planning produced in association with RBS. 7

8 STAGE 5 RESEARCH YOUR BORROWING OPTIONS 5 When evaluating lenders, it s a good idea to consider all sizes of financial institution, from the high street banks to smaller lenders in your local area. When weighing up your options, interest rates are only part of the story. Just as important are the support and advice that the financial institution is able to offer. We recommend booking initial consultations with loan managers from the first five lenders on your list. At these consultations, you can talk to the manager about your business and the loan application process. A good loan manager will offer lots of advice and support, and make you fully aware of the options available to you. It s crucial that they support you throughout the process. So if they aren t forthcoming at this stage, it s likely that the institution isn t right for your business. Top tip Take a thorough look at the full range of support offered by the lender, including the availability of small business advisors and the resources on their website. The level of support on offer can vary considerably. You can read impartial reviews on consumer websites such as 8

9 STAGE 6 COMPILE ALL THE NECESSARY FINANCIAL INFORMATION 6 As we mentioned above, it s worth asking your loan manager what financial information they will need you to provide in support of your application and how they want it presented. But, typically, you will be expected to provide the following: Aged debtors and creditors lists The aged debtors list is a record of all the outstanding customer invoices owed to your business. Meanwhile, the creditors list shows the amount you owe to suppliers. Lenders will look for a low number of debtors aged beyond 45 days, and for evidence that you pay your creditors promptly i.e. within 60 days. Management accounts When applying for a loan, you should supply monthly management accounts. These generally consist of profit and loss accounts, a balance sheet and notes on the accounts. Understandably, your loan manager will be very keen that your accounts show an increase in gross margins (your revenue, less costs) over time, although what is considered a good gross margin will vary depending on your industry. In addition, they will want to see trend data that is consistent from one month to the next. When identifying trends, your loan manager will analyse your revenue, direct costs (e.g. manufacturing costs and labour), overheads (e.g. rent and rates) and your bottom line (net profit / loss). The central pillar of your management accounts is your balance sheet. This should detail your: Fixed assets: property, fixtures and fittings, vehicles etc. Current assets: debtors, bank accounts, cash and pre-payments (items paid for in advance) Current liabilities: creditors, accruals, PAYE, VAT, Corporation Tax etc. Fixed assets are generally viewed positively by lenders. But a high ratio of fixed assets to current assets can show potential liquidity issues in the business. Top tip Much of the information above can be drawn from SAGE or other accounting software packages. However, you may need the help of a good accountant when it comes to analysing and interpreting the data (and identifying trends). 9

10 STAGE 7 CREATE YOUR PRESENTATION 7 Once you have arranged an appointment with the loan manager at your choice of financial institution, it s time to put your presentation together. The presentation should lead with a summary that: provides an overview of your business makes a case for why you need a loan explains why you can be relied upon to pay the money back. In essence, the remainder of the presentation expands upon and supports this summary. Included within the presentation should be your business plan, plus all the necessary financial statements and projections. To bring this information to life and raise significant data trends to the surface, it s advisable to make good use of visuals such as graphs and charts. It s vital that your presentation looks professional and is concise, well structured and closely argued. In an ideal world, it would do the job of securing the loan even were you not in the room. Remember to bring additional printed and bound copies of the presentation to leave behind with the loan manager for their consideration. Top tip Before you put together your presentation, ask your loan manager what criteria they consider when assessing an application. They should have no problem with filling you in. The last thing they want is to waste their time considering sub-standard applications. USEFUL RESOURCES Read these ten tips from Hazell Carter-Showell, the founding director of business psychologists Carter Corson, on Giving Influential Presentations : 10

11 WHAT TO DO IF YOUR APPLICATION IS UNSUCCESSFUL? Most importantly, don t give up. You may have to make applications to several financial institutions before you find one willing to loan you the money. This is quite common. The key is to learn from the rejections and fine tune your presentation along the way. The first step of the learning process is to ask your loan manager why your application was rejected. Many financial institutions actively encourage applicants to do this. Indeed, you may even be asked to reapply once you have made the necessary tweaks to your application (or got your hands on any missing information). Here are some typical reasons why your loan application might be rejected: There is insufficient security for the loan Your business bank account regularly dips into the red Your business regularly pays its creditors beyond the 60-day period There are issues with your business s credit history and credit rating (see STEP 3) The balance of fixed and current assets to current liability in your business is weighted towards the latter. USEFUL RESOURCES Organisations like Business Growth Hub exist to support ambitious small business owners like you. If your loan application is unsuccessful, they may be able to offer valuable help and advice. 11

12 WHAT IF YOUR BUSINESS IS A START-UP? There is no doubt that financial institutions are significantly less-willing to lend to startup companies. So you may want to consider looking into other sources of finance. These include crowdfunding, a means whereby the general public can invest in organisations and programmes. Alternatively, if you can demonstrate that your startup will have a positive social impact, you may qualify for an impact investment or a social impact bond. However, if those aren t viable financing options for your start-up, you may still have a chance of securing a loan, as long as you can demonstrate the following: your credentials within your industry and your past successes in building profitable businesses precisely how much money you need and exactly how you will spend it your business plan is the key here. As you are seeking finance for a start-up, your lender will also expect you to offer up security. The most obvious form of security is property, although we recommend that you think very carefully before taking this step. In addition to security, your lender will want to see that you are investing your own cash in your start-up. This will demonstrate that you are serious about the venture and confident about its prospects. USEFUL RESOURCES There is a large archive of tips from leading business people compiled for the benefit of entrepreneurs in the Members area of the SME Club website. Why not have a browse? 12

13 FINAL THOUGHTS Seeking the funds you need to take your business forwards is a challenging task for any small business owner particularly given the current economic climate. But you don t need to shoulder the whole burden alone. As we mentioned in STEP 2, there is a lot of help out there. We hope that this guide is a resource you can draw on to make the process easier and that it plays some small role in putting you on the path towards achieving your ambitions. For further information about the SME Club and how we can support your business, please call

14 ADDITIONAL SOURCES OF INFORMATION Advice, tips and information on a variety of topics such as finance and accounting Pressure group that promotes the interests of the self-employed and owners of small firms A community for growing businesses Business support to companies of all shapes and sizes Personalised support for high-growth businesses Business information portal, practical guides and advice Early stage seed capital for IT companies Grant information for the UK and Ireland Guidance on tax and National Insurance The Association of Practicing Accountants Ask your local council whether they have services to support business 14

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