One of the questions that comes up often is from someone who is having trouble getting a business loan. They are frustrated and want to know what they need to do to get that loan loan.
To answer this to have to first put yourself in the shoes of the bank manager.
Understand how the lender views the application
Banks make money by lending money and earning interest on the loans.
For example, if you borrow 10K at 6% the bank will earn interest of 600 per annum. However, if that loan goes bad, the bank will be down 10K. To recover that 10K the bank manager will have to lend enough money to earn 10K in interest. It will take additional borrowings of 166,667 at 6% to make back 10K. So is it any wonder the lender looks for something to increase his/her confidence in the application?
What do banks look for
When a banker is reviewing a loan application, they are looking for three things.
(i) Will the borrower be able to make the repayments?
(ii) If the loan goes bad, is there enough security available to recover the amount lent?
(iii) Can the bank trust the borrower?
The third item – trust – is the most important. If the bank cannot trust the borrower – if they have been let down in the past – then they will not put much value on answers to (i) repayment ability and (ii) security.
So when looking for a loan to the bank, you have to bring at least three things.
(i) A good track record. You need to have honoured any commitments you made in the past and can show them that they can rely on you.
(ii) You need to be able to communicate that you have a proposal which will generate sufficient funds to repay the loan requested.
(iii) Finally, you need to show that there is sufficient security that if the loan fails, then the bank can get their money back.
For the second item, you need to have the bones of a business plan. The level of detail needed will depend on amount of money being borrowed.
For the business plan, you need to show that there is a need for your product or service. You need to show that you understand the market for the product or service and the competition that exists for that product or service.
You also need to show that you can deliver the product or service on a profitable basis. Finally, you need to show that you, and your team if appropriate, have the capability to execute your business plans.
Ability to deliver on plans
One of the things that may come into play is how well you are currently managing your business. Do you have good financial controls and timely and reliable management information?
Have you been able to provide acceptable explanations for your historic financial performance?
Have you a track record of realising your plans and meeting targets?
You should always manage your bank account with a view to applying for a loan in the future, knowing that your track record will count when the application is being reviewed.
Purpose of the Loan
Finally, the business plan will need to show how the funds borrowed will be used.
The role of security
As regards security, it is important to realise that in asking for security, the bank is primarily asking how much commitment you are personally making to the project.
The banks don’t like calling in security. Its costly and they rarely get the full value for the security. But if you are not willing to show that you have “skin in the game”, then it will be harder to convince a bank to lend.
The Amount and Type of Documention
This varies with a number of things.
(i) The amount being borrowed
(ii) Previous experience with the bank – if they have had a good experience with you in the past that help.
(iii) The bank’s way of working – different banks have different approaches.
To summarise then, the best way to persuade a bank to lend is to put yourself in the shoes of the banker and be clear on what is required. Then assemble all the information and prepare a package to support the application.
Bearing in mind that the bank wants to lend with as much certainty as possible that the loan will be repaid repaid, your job is to present the information in such a way that the decision becomes a no-brainer for the bank.
If you have any questions on this post or you want to discuss an upcoming loan application, feel free to contact me by email at email@example.com or by phone on 086 2323525.