Applying for a business loan?

Applying for a business loan needs a 3-way forecast, and actuals to support your assumptions, with FUTRLI, these are simple to produce

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Applying for a business loan?

Preparing financial forecasts when trying to secure a loan is essential if you are applying for sums that exceed the typical small business loan products that are on the market. And of course, they must explain how your business plans to meet the loan repayment requirements.

Don’t just use the loan application as a one-off use case for your business plan. The forecasts you prepare will provide you with a set of targets, along with a method of identifying difficulties which may arise in future months and how such issues can impact your business, even after any loan is secured.

That’s not all that you need to do however. There are many options for lending in today’s market, but until you begin the process, you may be surprised about the information you will need to provide. Here are some funding options:

Crowdfunding products

First, choose the right option for your business as the bank is not your only one. Funding Circle, and Crowdcube are two examples of alternates. Many business operators think that crowdfunding platforms are solely for equity investment purposes, but that is not the case.

Some have developed their offerings in latter years and Funding Circle as an example has loan options from £5,000-£1,000,000 with repayments over 6 months to 5 years.

Crowd-cube is different in that it offers a Mini-bond option: you decide the annual fixed interest rate, typically between 6-15%, and the duration of the bond – usually up to 5 years. You get the growth finance you need whilst rewarding investors for their support with regular interest payments throughout the duration of the bond and their initial investment back as a lump sum at the end.

Their documentation on how to apply, is significant, but until you start the process you may be surprised to learn that you need at least two years of accounts in the case of Funding Circle, and you need to be showing profit for at least one of those two.

 

Invoice financing

For smaller funding amounts, you may be able to unlock the potential of any invoices owed to you. Products such as Satago, will credit check all of your customers and based upon the book value of your low-risk clients, they may even secure invoice finance within hours.

The more traditional route...

Which bank?

Generally speaking, it is almost always best to start with a bank. Your own bank would be the sensible first option, but, smaller banks often have competitive rates and offers that should not be discounted.

When you’ve chosen the bank or provider, look at the products they have on offer.

  • In the case of the crowd-funding sources. Many now have bonds that are an investment option, which means that they work more like a loan, circumventing the need to dilute your equity.
  • Banks will also have various loan products that you need to assess
  • Perhaps an overdraft or line of credit is the best option, the latter could give you the financial buffer you need to feel secure.

In any event, don’t go into the process with blinkers on and ensure you look at all of the options and how they impact you in the short and long term.

Top tip# Use the copying function in FUTRLI to create scenarios for each option, flexing how the repayment options affect your business.

How does your plan look?

Every business benefits from having a business plan. The plan should be revised regularly and the impact of how:

  • your business makes money,
  • your understanding of your market and
  • competition… should be reflected in the financials.

Any officer assessing whether to grant a loan, needs to understand that you have robust knowledge about all of the above factors. Demonstrating that you are serious about your business and that you understand how you fit into your local, national or global marketplace, will give confidence that you know why you need the funds and how you will repay it.

So if you haven’t completed a business plan – get to it!

 

It’s not just about your business finances...

Guarantees are an integral part of the loan application process for small businesses.

Do not underestimate that you may be called to put your house or other collateral up as a guarantee against any advance. And keep in mind that if you’re in a partnership or a corporation with multiple owners, this will apply to anyone with more than a 20% stake in the company.

How healthy are your credit scores?

There will be a credit check taken against the company. If you have not checked your business’s credit score to date, you can sign up to services such as Experian, for these details. If it doesn’t look great they will give you steps that you can take to increase your score. Typically banks will not lend if your score is below 700 as a guide. However if your revenues are high and the plan is water-tight, you may have success with a lower score.

If you are called upon to personally guarantee the loan, you will also have a personal credit check performed. They may also look at other personal financial information such as your past tax returns. How much you’re comfortable disclosing is up to you. But choosing to be open with your personal financials could give you a leg up in your quest to secure a bank loan for your business.

You’ll need even more company information

Before you begin your bank loan application, gather the following documents related to your business. (You may not be asked for all of them, but being prepared will help your application process move quicker):

  • Articles of incorporation
  • Business licenses & registration
  • Franchise agreement (if your business is a franchise)
  • Past two years of business tax returns, where relevant
  • Past two years and YTD balance sheets and profit & loss statements
  • Copies of vendor, customer, and other third party contracts

Remove the risk element

Every bank loan officer has a duty of care to protect the bank’s investment. If you can prove to them, with a solid credit report, no missed payments to your suppliers and a robust repayment plan, that factors in the loan amortisation, you will be viewed more favourably.

Using 3-way forecast scenario planning to simply illustrate how you intend to repay the loan investment will set you apart. Do the work for them to prove that you’ll be able to make the loan repayments for the entire term of the loan after making all sensible expense payments.

Complete these steps and you should be in a knowledgeable position of strength when finalising the loan application and answering the face to face questions that the loan officer may have.

Complete the application

And you’re there! If you’ve completed the steps above, not only will you know your business inside and out, but you’ll be ready to apply for whichever option you are leaning towards. Some of the options listed above will be quicker than others, so bear that in mind. Banks can sometimes take a couple of months, something else to bear in mind when you are creating your projections as you don’t want to leave it too late! Good luck!

“This Add-on is a must if you are looking for intelligent reporting for your business. It gives you the detail you need to see where you have been and also forecasts to see where you are going, this is invaluable if you are looking to approach banks for finance or give investors or decision makers the key data for the business.” - Brian Mason

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