Business Funding For Dummies Cheat Sheet

To yet a ‘yes’ for your own loan application, it helps if you can think more like a banker when preparing and presenting the information in your business loan application. By nature, banks are risk averse doing everything possible to ensure they lend only to businesses able to repay the debt and interest.

After all, lending funds one of the ways in which banks make money, and they use other people’s money in the form of deposited funds to make business loans.

They have a duty to protect this money while making some profit for the bank. Banks like a positive trading track record that gives them confidence you’ll be able to make the repayments they require, and you need to be aware of this when entering into discussions with your banker. You can understand, then, why the answer to many small- and medium-sized businesses loan applications is often ‘no’.

Keep in mind that bankers are

• Relatively conservative in their outlook.

• Guided by facts and figures.

• Averse to excessive and uncalculated risk.

• Need to see Plan B case you can’t meet your repayment obligations. (Bear in mind that you, not your business, may be the one making the repayments.)

• Very keen on having paperwork to back up the information in your application.

If you get turned down by your bank, learn from the experience. Ask questions about why your application was declined and use the banker as a learning resource and ally. Don’t be put off from appealing the decision or applying elsewhere.

Your business loan application may be rejected due to:

• A poor trading and earnings history

• A lack of a trading history

• A poorly written and presented business plan and financial forecast

• Too much debt or other financial obligations already, putting your ability to repay this debt into question

• Previous defaults on repayments or restructuring, indicating difficulty in making payments when times are tough

• Weak financial or accounting systems that indicate a lack of control and awareness of finances

• Very little in the way of collateral in your business or personal finances

• Something questionable in your character or prior business dealings, like a county court judgement or a problem with a directorship

To help you get a positive lending decision from your banker, use these tips:

• Take care in preparing and presenting your documentation. Make sure you prepare your documentation with both your business and the bank’s risk profile in mind. Know your audience and prepare accordingly.

  Make sure your business plan clearly states how much money you require, exactly what you’ll use it for and what return will be generated as a result of obtaining the funds. Your financials should be up-to-date and include cash-flow forecasts that illustrate your ability to repay the debt, along with forecasts of profit and loss statements.

  Your aim is to minimize any doubt or risk concerns in your banker’s mind, and make him feel like you’re a credible owner of a well-run business, with a very clear need for funding that will generate enough of a return to fulfill his terms and allow him to rest easy.

  Bankers don’t like surprises. If there’s something untoward or potentially problematic lurking in your business or in your business plan, don’t try to hide it or cover it up. Get it out in the open, but be prepared with a solution to minimize the risk it presents or to solve the problem it poses.

• Check your personal and business credit records. You may have something nasty sitting on your credit file that you’re not even aware of – it happens often. Check your credit report, try to resolve any problems and have an answer for any questions it might raise. You can check your credit record on a number of websites; the most common are Experian and Equifax.

• Cultivate a relationship with your banker. In seeking a loan, if you have an ongoing business relationship with your banker, try him first. It’s hard to approach a complete stranger for money when you need it the most. Getting to know your bank manager may not result in a successful loan application, but it may make him more likely to give you a frank and honest assessment of why your business gets turned down, helping you not make the same mistakes twice.

• Look beyond your own bank. It’s easy to fall into the habit of always going to your own bank for funding, but banking doesn’t have to be a monogamous relationship. You can have more than one banking relationship, and you may find that another bank can offer you what you need. A decline from one bank may be determined by internal bank restrictions that have nothing to do with you as a business, so it pays to shop around. A second opinion or counter-offer could be a helpful tool in negotiating a better deal from you own bank. Either way, talking to other banks gives you a better idea of what’s available on the open market, and may help you get to ‘yes’.

You may not be able to obtain a bank loan for your business or a loan at terms that are acceptable depending on the stage your business is at and the risk profile of you and the sector your business is in, so casting into fresh waters may be required.

However, other forms of business debt finance are out there, whether your need is for working capital, expansion or physical growth. Alternative funding sources may be better suited to your purpose:

• Overdraft: If you have a cyclical business or a fluctuating cash flow, and your funding need is short term, a bank overdraft facility that you can pay interest on as you draw down could be a good solution.

• Invoice finance: If you have invoice payments that are due to you from pretty solidly run and financially secure companies that are taking a long time to pay, you can essentially sell off your invoices for a straight advance or via an auction platform, like Market Invoice for example, and get a large percentage of the money due upfront, with the rest to follow, in exchange for admin fees and interest costs.

• Merchant cash advance: If your business takes credit-card payments, then you can borrow against future revenue on a short-term basis.

• Peer-to-peer loans: A bit like crowdfunding for debt, peer-to-peer lending lets people lend to businesses in return for better interest rates than they get elsewhere. Your business stands a better chance of getting some funding in quicker and maybe at a better rate than through a bank loan. You need to put some information around key business data on the site, and there is an underwriting process, but the concept is increasing in popularity, with platforms like Funding Circle leading the way.

• Asset finance: Asset-based funding lets you borrow against the value of an asset you need to acquire, be it equipment, premises or stock. You can approach specialist providers such as Close Brothers, or most banks have a separate asset finance firm.

• Family lending: One alternative to a traditional bank loan is a loan from the bank of mom and dad or some other family member willing and able to lend your business some money. Often you get this money at a much more favorable rate than you’d get in the open market. Just remember to get it all agreed in a legal document.

• Equity: If you’re happy to sell a stake in your business, then equity finance could be an answer. It comes in a variety of guises from individual or small groups of business angels to venture capital funds, crowdfunding platforms and private equity houses. Angel investors come into your business earlier than most equity investors, and for smaller amounts, making the most of the UK tax-incentive schemes for investors. Venture capitalists sometimes come in at a relatively early stage in your business but are more likely to be your second significant round of funding. Private equity firms tend to come in much later, as you prepare for a stock exchange listing or some other kind of exit, and for much larger amounts, with many of them starting to invest at the £10 million mark.

• Crowdfunding: You can harness the power of the masses by offering shares or rewards in your business in exchange for funding using crowdfunding platforms such as Seedrs, Crowdbnk and Crowdcube. The bonus byproduct is widening your market exposure and gaining additional customers.