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What do I have to do to get a business loan?

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.

Business Plan

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.

Summary

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 jim@accountsplus.ie or by phone on 086 2323525.

Tips for Managing Cash

In the past year, I have spoken to a number of different audiences on Managing cashflow. In the course of my work as a mentor on Bank of Ireland’s Enterprise Builder Programme, it is clear that managing cash remains an issue for many companies. So here are the key points from the presentations that I made.

  • Prepare Plans and Forecasts
    These help you to understand what is coming up. They identify early on any overall problems and any “lumpiness” in your cashflow. You should be clear about your key assumptions – these will include Activity levels/Collection and payment times/Once off investments etc. You should also determine how much to put aside for tax, annual payments such as insurance etc
  • Prepare a Rolling 6-week forecast.
    This will be similar to the annual forecast but will be working in smaller time intervals. Watch for weeks where you might be hitting up against your overdraft limits. This rolling 6-week forecast highlight possible breaches of your limits and gives you a chance to do something about it.
  • Choose your customers
    Remember that you don’t have to take everyone. A customer that does not pay or a customer that costs too much to services is not worth it. You should have some a process for evaluating prospective customers. This would consider factors such as their payment history, their profitability, the quality of interactions with them (do you like dealing with them?), are there ongoing issues (returns, hidden costs etc). Check their credit rating.
  • Be clear about your credit terms and stick to them.
    Your customers should know exactly when you expect payment and you should enforce your terms. Your terms with include the timing of payment and the maximum amount that you extend to any customer. It is much easier to set and enforce these from the start than it is to try to tighten up with an existing customer. Put on hold, those customers who are not compliant with your terms – whether this be relating to the time or the total amount. Consider asking for deposits or stage payments – this is more appropriate for some sectors than others.
  • Have a process for invoicingis
  • Invoice in a timely way. Know who/where to send invoice. Before invoicing, ring the customer to ask if everything is ok – they can’t come back with issues later. Consider if you will need Proof of Delivery – do you have it?
  • Have a reliable collection routine.
    Before payment is due, send out a reminder. Have a standard defined procedure for follow up or escalating overdue payments. Send out statements – Some customers only pay on statements.
  • Manage Cash Tied Up
    Many businesses overlook the amount of cash that can be tied up unnecessarily. Review your Stock Levels , your Debtors and your Prepayments. Are you paying too early with some of your suppliers? Do you have clear rules for purchasing stock – is there a logic to these? Do you take Credit where you can (and where it saves you)?
  • Control Your Expenditure
    Remember that you have most control at rhe start of the Purchase to Pay process. Do you have a Purchase Order (PO) authorisation process? Review all costs and consider whether they are really necessary and that you are getting best prices. Consider Asset Finance for computers, vehicles, plant & machinery
  • Working with the bank
    Keep your bank manager informed. This demonstrates that you are in control and devleops confidence in you and your business. Remember that when there are some signs of problems, lack of communication from you is the single thing that worries them most.
  • Managing Shortfalls
    Become aware of shortfalls as soon as possible. Understand whether they are temporary or longer. Look at all the options to overcome the difficulties. Talk to your bank. Talk to suppliers. Consider invoice factoring/discounting. Offer early payment incentives to customers. Careful payment of bills

So overall then the message can be summarised as follows. Understand and Plan – aim for early warning of issues. Be proactive – choose customers, set credit limits, have process. Review business for cash tied up. Manage your bank manager

As always, if you have any comments or questions please email me – jim (at) accountsplus (dot) ie.