Getting that loan

Management skills

Poor management skills are the reason 80% of owner-managed firms go under so you will need to show that you have a good track record in managing your business and the ability to understand the financial aspects and controls that
relate to your business.

Business Plan

All lenders will want to see your business plan. You need to make sure that this is well thought out and covers why you need to borrow the money you are after and how the business can repay it. Cash low projections to demonstrate how the loan will be serviced and repaid.

Security

Security is an important aspect of a lending decision. Every lender will want some form of rock solid security to fall back on and in most cases that will be bricks and mortar. If this proves to be insufficient to back up the loan you will probably have to provide personal guarantees.

Investment and Capital

Often, in small businesses, lenders have more money invested in the business than the owner. Lenders like to see business owners invest their own money in their businesses. It’s also a fallback against potential losses. However, while this may show commitment, it’s no substitute for adequate capital resources. Insufficient capital or under-capitalisation are also major contributors to many business failures. So asking for too small a loan may be counter-productive.

Looking at Your Debt Sensibly

Many small businesses rely on an overdraft when they might be better off with something more structured, like a term loan. A lender may even suggest you do not need to borrow at all: factoring invoices, hire purchase or leasing may be better options.

The right loan for you

In the end getting the right loan will have a big bearing on your cash resources over time. A bank overdraft is in fact a very temporary loan and should be used to iron out the ups and downs of a month’s cash flow. If you are buying an asset that will last for many years e.g. a new factory, this will need a long term loan. If it is items like plant and equipment, these are medium loans and are usually financed by lease, hire purchase or rentals.

What lenders will be looking for

– Character: do you give the impression you will make your plans a reality?
– Ability: do you and your people have the right skills and experience?
– Means: what are the business’ and your own personal assets?
– Purpose: what is the purpose of the loan? Is it for a sensible cash-generating plan? Few lenders will lend money to pay debts or to give you a nice pay rise.
– Amount: ask for enough money, but not for more than you need. What funds will you put in to reduce the lender’s risk?
– Repayment: prove you will be able to repay the money with a realistic cash flow forecast.
– Insurance: lenders are wary of under-insured businesses. An uninsured loss could destroy you, after all.

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