Before you apply for business finance it’s important to have all the information at hand that the bank will need. The more prepared you are, the better your chances of success.
So, before you go to the bank, get as much detail together that you can.
The purpose of the loan
Sounds obvious, but you will need to spell out what the money will specifically be used for in your business. It allows the bank to be confident the funds are being spent wisely.
Typical loan requirements include:
- Buying a business
- Set-up costs for a new business
- Replacing old equipment
- Capital for new product development
- Funds to enter a new market, including exporting
- Short-term working capital to fund a cash shortfall
- Funds to cover materials or inventory
Regardless of the reason, you’ll improve your chances of getting a loan if it’s clear why you need it and what the ideal outcome will be (more capacity, new markets, operate faster, expand sales).
Loan alternatives
It’s common sense to borrow as little as possible. Outline how much you’re contributing yourself – such as cash reserves from the business and any personal savings. If you have equity in a home, explain why you’re not using this form of (often cheaper) finance.
Also cover other alternatives such as assistance from family or any investors.
If possible discuss any ‘bootstrapping’ tactics you’ve tried to raise cash like selling old equipment, clearing old inventory at discount prices, borrowing rather than buying, seeing if customers will pay in advance, and joint ventures with other firms.
The loan
If you can provide the bank with information at the start of the application process that helps them make a decision, they’ll be reassured you’ve thought carefully about the loan.
- What collateral you’ll use to secure the loan. Borrowing against your house is common as it’s usually cheaper than unsecured loans, but there are other options.
- How you will manage any existing debt. Your banker will want full disclosure.
- Any other sources of income you can use to repay the loan.
How you’ll service the loan
It’s a great idea to show that whatever amount you borrow you can pay it back, ideally from the extra profit the business will make from the capital you’ve borrowed. No bank wants you to default on a loan.
It’s best if you provide:
- A statement that outlines everything you own as well as what you owe and your income and living expenses (including those of your partner if you have one, or any dependents).
- Details of how much you intend to take from the business as a salary or wage and if you’ve got another source of funds in reserve.
- A business plan or outline of the business so the bank can get a clear understanding of the business and where it’s going.
Security for the loan
Be prepared to provide security, such as real estate or business assets. You may be asked to include a registered valuation for any property security. For a commercial property, a copy of the lease is handy.
The business structure
In addition to your business plan, you’ll also want to:
- Provide details of who owns the business – whether you’ll be working in the business full-time, if there are partners and who else is involved in management.
- Provide details of the operational structure. Are you a private company, partnership or sole trader?
- Show that you’ve had professional advice from your financial advisor or accountant. They also like to know you’ve benefitted from legal advice.
- What you’re selling, providing or producing.
- Details about your competition, what’s happening in your market and industry.
- Details of any lease terms or other financial contract information.
Provide a CV
Show your industry and self-employed experience, if applicable. Ultimately, it’s you that pays the loan back, not the business. Include:
- Past business experience and industry expertise.
- Details about any business partners and key personnel.
- Any qualifications that relate to your industry and business.
Prepare financials
It’s important to show that your business can generate enough cash to meet your monthly obligations (with your new loan added in) and still provide an income to you. Your financials should include:
- Monthly profit and loss projections.
- Monthly cash flow forecasts.
- How the loan will impact your balance sheet.
Be prepared to describe why you think your sales are achievable, any market research you’ve done, how you’ll achieve your projected profit margins and any key expense items. Make sure you allow for the extra costs in achieving higher sales results.
Summary
Every bank manager wants to approve your loan application and support your business. They want to work with you and keep you as a happy customer for years. Help them to say ‘yes’ by coming prepared with supporting documentation, information and explanations about your business and your personal financial situation. You’ll increase your chances of getting a loan approved and make the application process much easier – and perhaps faster.