Bank On The Banks, or Borrow Elsewhere?
This blog post has been kindly contributed by Dave Farmer of Lime Consultancy and looks at what ticks the bank’s boxes in terms of agreeing business loan and overdraft facilities. If you are looking to raise finance from the banks I’m sure you will find it useful. Forthcoming blog posts will address alternative sources of finance.
Remember the heady days when you knew your bank manager, a bit on lunch, explain what you were going to do, then get the funding agreed? Those days have passed and we are now in a brave new world where preparation, understanding and options will decide how easy it is to finance your business.
How Banks Approve Business Loans
A bank will tell you everything but what you really want to know. The fear is that if you know how they work then the integrity of their loan assessment systems will be compromised. The reality is that too many businesses are being declined finance because they simply don’t know the rules of the game.
The reason why this suits most banks is that they get to see a large number of proposals, rejecting the ones that miss and approving the top drawer applications.
The level of business loans being declined has increased. If you add into this that the ‘declined’ number excludes those applications that never made it past first base, then the true figure is probably a lot higher.
Rules of The Game
These days it is about understanding what the bank wants, then giving it to them. Our top tips to being successful are;
1) If asked for a Business Plan, say you have one and update it regularly. Never ever say that you can;
A – Make one if you have to
B – Check with my accountant
C – Respond with something along the lines of ‘really?’ or ‘Well,I had one when I started…’
The biggest thing banks want is experience and ability. A business plan says you know where you are and where you are going.
2) Have you management accounts and understand them;
Banks love figures. However, figures will only ever generate questions. A set of accounts have never answered anything, they only generate questions. So with this in mind make sure you know what the figures you have are saying.
If asked for up to date figures then don’t pass the buck to your accountant. Your accountant may well be producing these but you need to demonstrate that you know what is going on. A simple on-line bookkeeping system is cheap and effective so use one.
The other key thing here is cash. A P&L and Balance Sheet are great, but what really matters is how much cash you are generating. Profits don’t repay a loan, cash does. If you are not sure what your cash generation looks like then speak to Robert Bradley, or have a quick read through this – http://www.limeconsultancy.net/blog/2014/01/27/cash-generation-loan-affordability-guide
3) Get you current account looking better than Claudia Schiffer;
The very first thing your bank will do is look at your current account. This is normally done through an internal system. If your account is always up against it’s limit, or exceeding the overdraft then you may hit trouble.
The answer is to plan ahead. In the couple of months before you apply, get your current account in order, run the account better than ever. It will get you past first base.
4) Public Information, is it all looking good?
Banks will look at what they know about you and your business. We often suggest that businesses present themselves akin to a DVD (see this – http://www.limeconsultancy.net/blog/2014/04/30/business-investment-pitch ). However we would also suggest you do the following;
A – Update your website, make it current
B – Update Linkedin. Everyone who is someone has a Linkedin profile, please get it looking snazzy and make sure it ties in with what you are telling the bank
C – Credit file. Get your credit report from Experian or Equifax. Check it and make sure it is all correct
D – Filter Facebook. Don’t go saying how professional you are if there are public photos of you last Saturday night face down outside the pub. Yes, banks will google you before you meet.
Get these bits right and you should be in with a fighting chance. You can always run any proposal past us (http://www.limeconsultancy.net) and we will give you a no obligation, no cost summary of things.
Other than that, know the rules of bank lending and finance will be just that little bit easier.