No matter who you are the banks, business angels or government agencies who are lending you the money all want to know that their money is safe.
Poor management skills are the reason 80% of owner-managed firms go under. So this is the first thing that lenders will look at when considering you for a loan. Before they will lend you the money they will want to see that you have a good track record, the expertise and skills to adapt to changing financial and economic circumstances, a good product or a quality service, good financial controls and ideally growth prospects. Above all they want to know that you have the ability to repay the money.
The Business Plan
All lenders will want to see a business plan. You need to make sure that this is completed correctly as this will explain why you need the money, how much you want and for how long. Including cash flow projections to demonstrate how the loan will be serviced and eventually repaid. Both the business plan and the cash flow forecast also need to be realistic.
All lenders are sceptical of over-optimistic forecasts. It is better to be cautious. If an accountant has prepared your cash flow forecast, lenders know the figures will all add up. However, they will want to know that you have a real understanding of the rationale behind the figures.
Projections are based on assumptions, so you must say what these are. Lenders question everything, it's their job. Many business plans fail to impress lenders because they fail to consider all eventualities or come up with alternative strategies should problems arise. It is imperative that you look at all eventualities and have at least one back up plan.
Ultimately all lenders have to decide whether or not your proposal is viable, based on your past performance and their knowledge of the market. So if you are an established business, lenders will want to see your annual accounts (ideally for the last three years) to review historic trading performance and identify any trends.
Your Current Position
All lenders will want to know your up-to-date trading position and to see regular management accounts. They will also want to look at bank statements and VAT returns. Balance sheets represent a one-time snapshot of the business. So lenders may dig deeper to find the real cash-producing capacity and the extent to which any liabilities might become real.
The lender will also want to know the true rather than book value of all your assets, should it become necessary to consider a forced sale. Notwithstanding your budgets and cash flow forecasts, lenders will use some basic tools to assess your plans, such as a simple break-even analysis. At the very least, you should be able to provide a rough figure for overheads and other fixed costs, and an assessment of the gross margin expected on sales.
Lenders worry about over-reliance on too few suppliers and/or customers, often a major problem for small businesses. This is where a late payment of a big invoice could destroy your cash flow. And a key customer going bust is often fatal. If this is your situation, your business plan should show how you intend to rectify this weakness.
Security and Commitment
Security is an important aspect of a lending decision although it is never the main factor. It is there to provide a guarantee of repayment should all else fail. Some lenders feel that a director's guarantee supported by personal assets is enough.
Investment and Capital
Lenders like to see owner/managers invest their own money in their businesses. It's also a fallback against potential losses. However, while this may show commitment, it's no substitute for adequate capital resources. Insufficient capital or under-capitalisation are also major contributors to many business failures. So asking for too small a loan may be counter-productive.
Looking at Your Debt Sensibly
Many small businesses rely on an overdraft when they might be better off with something more structured, like a term loan. A lender may even suggest you do not need to borrow at all: factoring invoices, hire purchase or leasing may be better ways of releasing cash.
Lenders' Favourite Tipple
Every lender will look at seven key areas before lending: CAMPARI:
Character: do you give the impression you will make your plans a reality?
Ability: do you and your people have the right skills and experience?
Means: what are the business's and your own personal assets?
Purpose: what is the purpose of the loan? Is it for a sensible cash-generating plan? Few lenders will lend money to pay debts or to give you a nice pay rise.
Amount: ask for enough money, but not for more than you need. What funds will you put in to reduce the lender's risk?
Repayment: prove you will be able to repay the money with a realistic cash flow forecast.
Insurance: lenders are wary of under-insured businesses. An uninsured loss could destroy you, after all.
If your lender does not ask for all of this information then you should look at another more professional lender.
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