Securing a business loan in the current economic climate has become harder than ever. But what can you do to get the banks on your side?
Most business owners have been frustrated at some point by a bank declining their loan application. The chances of being turned down now are even higher, as banks have begun reducing their business lending and tightening approval criteria in light of the “credit crunch” and expectations of a downturn in the economy.
This means proper preparation for a loan application has never been more important. Remember that your bank manager wants to approve your business, as they have sales targets and dream of a bonus like most salespeople. But they need your help to instil confidence at the bank that your business can and will repay the loan, especially to bank staff who won’t have the opportunity to meet you firsthand.
With the appropriate research, face-to-face presentation and package of information, a loan approval is well within the grasp of many businesses, including some that may have been previously declined.
Before you start
It’s important to seek the right advice on suitable finance facilities for your business, as there’s a growing array of options available. Speak with experienced advisors such as your accountant or finance broker and a range of traditional banks and alternative lenders. These discussions should explore the proposed use for the money, a preferred repayment plan and the security available. This will also help you shortlist suitable financiers for the formal applications.
The pitch
Once potential finance products and lenders are selected, the next step is a series of face-to-face meetings with potential lenders that should be booked at least a few days in advance. Your personal presentation is important, so wear business attire and be punctual for your appointment to illustrate that you’re well organised.
Preparation is the key to a successful meeting and it will also boost your confidence. Be ready to discuss your business, its history, industry, financial information and future plans. Lenders will also be interested in your personal experience, qualifications and management role in the business.
During this meeting it’s important to demonstrate a comprehensive knowledge of your business and industry, whilst being realistic. This gives comfort that your business is a low risk and should be lent money.
Following your earlier research, also share with them your thoughts on how much funding the business needs and how this will be used and repaid, including the additional revenue that the loan will generate. They’ll also be interested to know of any special risks in your business and how they’re mitigated, as well as explanations for any prior loan defaults on borrowings through any lender.
Follow-up phone calls to ask further questions are common and present a great opportunity to reinforce their impression of you as a competent business manager, by giving prompt and accurate answers whilst being polite and professional.
The package
The meetings with potential lenders are important, but the package of written material you provide to them is even more vital, as it will be their principal source for information when assessing your application.
A well-prepared and neatly presented package of information should include the following items:
1. Financial information
Lenders rely heavily on financial information, so essential inclusions are the profit and loss and balance sheet statements for your business. Don’t forget to include interim financials if these are more than a few months old.
If you can include an aged listing for both debtors and creditors it will enable potential lenders to see that your business is vigilant in following up customers for payment and that it pays its accounts when due. A cashflow forecast is another useful inclusion, as it shows how the loan will be afforded and helps alleviate any concerns of a working capital shortfall in the business.
An asset and liability statement for each relevant director or shareholder should also be included, with individual statements outlining details of all assets and liabilities held in their personal names. All this financial information needs to be correct, with suitable explanations provided for any extraordinary items or significant variations.
2. Business plan
Forget the lengthy business plans of old that were laboured over for days and then read by no one. Today’s lenders need a short but information packed business plan that clearly conveys the key aspects of your business and future plans, including the following details:
• Overview: including business name, address, owners, history, industry, products, structure, related companies and number of employees. If there are multiple companies a family tree would also be useful.
• Management: including education, industry experience and professional accomplishments.
• Customers: details on the average customer and how your product meets their needs, including any unique points of difference. If there are a number of key customers, explain how the loss of one or more of these would be handled.
• Suppliers: details of any key suppliers to your business and alternatives should a significant supplier be unable to meet your future business needs.
• Business goals: state your expectation in terms of sales, income, business operations and marketing strategies for the next three years. Substantiate these expectations through business performance to date and plans that detail how these goals will be achieved.
• Risks: list the key risks in your business to give a potential funder comfort that you’ve assessed the risks and have contingency plans in place to cope with them.
Remember to make the document easy to read by avoiding industry-specific acronyms or terms, whilst keeping the professional image through ensuring it’s free of spelling errors.
3. Supporting information
Be sure to include items such as brochures, newspaper and magazine articles, copies of advertisements, client testimonials, references and other promotional material. These boost your business’ profile and highlight its professionalism and approach to business development.
Red carpet, not red tape
To enjoy benefits when borrowing that include cheaper pricing, quicker loan approval and, perhaps most importantly, understanding and flexibility if there’s difficulty repaying the loan, it’s paramount to have a good person to person relationship with your lending manager.
Many small business owners enjoy these benefits and your business can too. Make sure you find a local lending manager that can meet with you in person and visit your premises. It’s also crucial that they suit your personal style. Ideally they should be interested in your business and have some understanding of your industry.
Once your initial relationship is established, keep them updated on how things are going. If they have a good knowledge of recent activities they’ll be better positioned to assist. When they call, don’t be tempted to ignore it. Return the call promptly as you normally would, giving your bank manager the respect you’d like to be shown in return.
So, be prepared and confident when seeking a loan and remember to share your vision and enthusiasm about your business. Keep in mind that establishing a relationship with your lending manager is an investment like any other business relationship, with enormous dividends that can give your business the credit it deserves.
– Matthew Nolan is managing director of Provident Cashflow (www.providentcashflow.com.au). He has more than 18 years’ experience in banking and finance, specialising in providing finance to SMEs.
