You’ve decided that a business loan is the best way to raise the finance you need for the next step in your company’s journey. But the pathway to actually having the application approved – and the funds released – can sometimes feel quite daunting.
Nobody understands your business like you do. The secret to success in applying for a business loan is demonstrating that knowledge, passion and expertise to a suitable lender. They’ll look at a range of criteria when assessing potential financing solutions – and the stronger your application, the more likely you are to get approved.
Creating a solid business plan
A comprehensive business plan should be at the heart of your application. It’s the DNA of your business – a roadmap outlining who you are, your goals and how you plan to achieve them. It covers everything from strategies and objectives through to financial forecasts. There are several online resources which can help you write and structure a plan that’s tailored to your business, its sector and ambitions but they all share several common features:
Summary – keep this short and to the point. It’s an overview of the whole business including its overall mission, offering and financial position
Company description – history of the business, organisational structure and your core products and services
Market research – this is where you can provide details of where your business sits within the wider industry. Who are your customers? What are the recent industry trends? Who is your competition? And how does their service differ from yours?
Sales strategy – how do you propose to market and sell your products and services? Do you sell directly to the customer or through a retailer or third party? What proportion of your business is online? How long does it take to make a sale?
Business operations – do you own your premises? Do you use production facilities? How resilient is your IT infrastructure?
Financial forecasts – this is an essential part of your business plan and will be carefully analysed by the lender
Remember your audience when writing a business plan – focus on what the reader needs to know. Ultimately, you’ll want the lender to be confident that you know your business and your customers or market. So it’s key that you’re clear and accurate and that you are across your finances.
Preparing financial forecasts
If your business plan is the DNA of your business then your financial forecasts are its flesh and blood. A full-scale assessment of your incomings and outgoings may make you feel apprehensive but try to look at it as a great opportunity to translate your passion and belief in your business into a set of figures.
Your financial forecast underpins your business plan and business loan application. It’s important to be accurate, clear and realistic. Equally, forecasts need only reflect the complexity of your business. The parameters and data points required for a small business of ten people will clearly be on a totally different scale to those of a sole trader.
Try to bear the following in mind:
• Use a clear and consistent layout for all the financial information you present
• Every business would need to produce up to date balance sheets and a profit and loss account
• Historical financial information will also be required – lenders will want to see how the business has performed over the last three to five years if possible
• Be realistic about your financial forecasts and explain your reasoning and any assumptions (about market conditions for example)
Make sure you get the support you need to put this together and present it – this might be from your accountant or from an independent small business adviser that can help you free of charge.
Understanding your credit profile – and how to improve it
Put simply, your credit profile is a report that shows your financial history – including details on debt records, repayment history as well as past credit applications. It’s a core component that lenders will consider when considering a business loan.
It’s possible to have both a personal and a business credit score. But if you’re a new business then lenders will probably need to use your personal credit score in their assessment. Personal credit histories are also important for sole traders and partnerships. Even the partners and directors of limited companies may have their personal credit records checked.
Your personal credit score is a three-digit number. The higher the number the better the score, though the exact range depends on the credit reference agency you use. You can check your personal credit score for free online without affecting the score itself.
There are some simple steps you can take to help improve your credit score over time:
– Pay your bills and repayments on time – by direct debit if possible
– Make sure you only borrow what you can afford to pay back and keep the balances as low as you can
– Limit your credit applications – too many hard searches on your report will be picked up by other lenders
– Maintain your older, well-managed accounts as they will have a longer credit history
Using business assets for loan security
In the UK there are several different types of business loan available. One option – a secured business loan – allows you to use company assets as security. For example, if you own your premises then you can use those as a form of guarantee that the loan will be repaid.
It works for the lender because it ensures that they’ll be able to recoup the value of the loan in the event of repayment terms not being met. And it works for the borrower because the repayment terms are often more competitive than an unsecured business loan. For example, the borrower might be offered lower interest rates because the risk has been reduced for the lender.
Typical assets (or collateral) a business may secure against a loan include commercial property (office space, factories, storage facilities), equipment or machinery (for example, computers or production line technology) or inventory (stock) or, in some cases, cash or invoices.
Testimonials and endorsements
In the same way you might expect to provide references when applying for a job, a testimonial can be a persuasive way of demonstrating your business’s credibility to a lender – particularly if you’re a newer business with a limited financial record.
Clearly a lender will focus their attention primarily on your financial stability and business plan, but testimonials can be helpful as supplementary evidence of how you and your business operates.
Think about who might be able to endorse you regarding:
– Company reputation
– Industry knowledge
– Trustworthiness
– Quality of product or service
– Relationships with customers or clients – now or in the past
– Financial stability
– Intent to do business with you in future
Each loan application and lender will be different, but any evidence that helps present you as a confident and reliable business owner will only have a positive impact on your overall application.