Having worked with numerous businesses over the years, some common themes emerge when it comes to getting a financial institution to grant a loan.
True before the dreaded Corvid-19 hit us, and even more so now with such much uncertainty around.
Any loan application has to make sense
Although banks are being offered 80% protection on any losses by Government (and rumours persist this may increase to 100% soon), any loan application has to make sense.
I’ve been frequently surprised at how superficial the whole loans process can be for businesses. Lenders all too often don’t ask any searching questions and seem to be happy with last year’s filed accounts and up to date management accounts.
It’s rare for them to ask for much more, which means they often have a very incomplete picture and all too often it means a loan application is refused, even though it makes sound business sense.
Supply a complete breakdown
Businesses mustn’t rely on merely answering the lenders immediate questions and requests for information – that’s the bare minimum. Why not supply the lender with a complete breakdown of what you will do with any loan, not in a superficial way, but showing monthly cash flow forecasts for the next 3 years.
And showing the impact of different assumptions – what-if scenarios that demonstrate you are thinking strategically, can cope if growth isn’t as you expect or when you expect it.
How much confidence would that give a lender that you are a good long term proposition?
And yet very few businesses do this effectively, or tackle it with an open mind to determine the right course of action for them – it tends to get regarded as something the bank wants and is a bit of a pain to compile.
The numbers and different scenarios should be helping drive your decisions before you ask for a loan – it should determine how much you need to borrow, where the financial pinch points are and when they occur, what’s sensible and affordable too.
I have seen some great examples of this in action recently – a business working closely with its accountant to stress test different scenarios, spending time and money to get it right before submitting a loan application – which blew the lender away with the quality of work produced, meaning the loan was granted quickly.
It applies to businesses of every size too.
I’ve just read a report of a large public company raising money quite easily, simply because they put the legwork into why they need the money, what they are going to do with it and covered the ‘what if’ scenarios in details – simply gave investors’ confidence, which after all, is what they want!
So my advice, take time, work with your professional adviser to think through exactly what you want to borrow before you approach a lender.