Not easy at all, is the simple answer and it is not just about your businesses credit score… although it helps to have a good one.
Who you approach and in what order and how you prepare for it is key. If we assume for the moment that your business has a good credit score, is profitable, has consistent financial ratios with a strong balance sheet and assuming you have a good relationship with your bankers you should always approach them first. As long as your business is not overly reliant on debt or other loans (highly geared) and you are not over-stretching the business with the new loan proposal, there is a good chance you will be successful and the process will be relatively painless and simple.
Yes… Banks do still say yes; but what happens if your bank says no? Is that it or should you try to find out why and whether you may be more successful elsewhere? The ‘why’ is always an important question. Banks like all commercial organisations use in the first instance credit scores and your business financials to determine whether they will lend. They will also look at your business plan and the reasons cited why you are seeking finance. How you present your loan application to the bank or indeed to any prospective funder is critically important. In the short term there is not much you can do about your credit score, unless you have satisfied County Court Judgements (CCJ’s) which can be removed. Likewise your financials cannot be improved overnight and you cannot change your profit and loss account and balance sheet from a period which has already finished.
You can though showcase your business in a favourable way, by projecting your financials forward, showing that the business is growing and that profitability levels and balance sheet ratios will improve. Putting this in a concise and easy to read format will help a prospective funder to view your loan application more favourably than it might have done had it just been reliant on your credit score and year end financial statements.
The 5 Year Plan
So how do you achieve this? Keep it simple. Draft a one page business summary, introducing your business and its strengths, then outline on the same page, your 5 year plan and why you need funding. The 5 year plan, should try to show an increase in sales, gross profit and net profit, but keep it realistic. Too big an improvement in any area will make your plan look unachievable. You should summarise your 5 year plan like this:
| A O BUSINESS LTD- 5 YEAR PLAN | |||||
| year | sales | gross profit | gross profit % | net profit | net profit % |
| 1 | |||||
| 2 | |||||
| 3 | |||||
| 4 | |||||
| 5 | |||||
As suggested above and within the same A4 page, you should detail what the prospective funding will allow you to invest in. e.g.; 2 additional staff members, new software and a marketing programme. And try to make it look as if the additional investment in staff etc, will assist your growth and profit plans.
The twenty-four month profit and loss and cash-flow projection.
That was the easy bit. A prospective funder is going to want some flesh to be added to the skeleton plan that you have outlined. Don’t go mad and give them 5 years of detailed data. Take your last set of financial results and current monthly actuals and breakdown for the next twenty-four months, month by month, your Profit and Loss account. Then link the data to your current bank account and try to produce a working cash-flow forecast for the same period, making sure you include the anticipated injection of cash (the loan) and the new costs for which the cash will buy. Linking the two documents together, to show changes on one document will make changes on the other is a little complex, but will make it more credible, particularly if you are sending a soft copy of this document to your prospective funder. Remember, that the 1st and 2nd year end of year figures here should equal the year 1 & 2 figures on your 5 year plan. Finally, if you have the gumption… have a go at generating a balance sheet from the data derived from the end of the 24 month period. If you can tie this in accurately, to really shows you mean business.
So who do you approach for funding?
As suggested above, you should always try your bankers first, as they already know you and the process for obtaining perhaps an increased overdraft or a new loan, may well be quite straightforward. If this is unsuccessful, then you need to find someone who will agree to fund your requirements and at a good rate and post 2008, there are now a whole raft of additional areas to explore. Perhaps the most popular form of business funding now is peer to business lending or crowd-funding. This is where individual lenders each bid to lend you part of the loan at their preferred interest rate, thus making up the whole loan required with a large number of lenders. Once you loan application has been approved by the Funding Company and a bidding platform has been opened; over a period of days, a large number of individual lenders will build up to the point where the loan becomes fully funded. With new bidders coming in and gradually reducing the overall interest rate. If you leave the fully funded loan right to the end of the bidding process, you will frequently see interest rates similar to those offered by the banks. Loans of this type have become very popular. They are usually web-based, fast and as long as you follow the rules and make your funding proposal attractive will usually be successful. An alternative to this is of course peer to equity lending, where individuals provide equity for your business and are given shares in return. This is a little more complex and is akin to seeking funding from business angels or indeed the ‘Dragons Den’, but this may be an option worth considering if you are prepared to let go of some of your share of the business, rather than burden your business with a repayable loan. There are of course a number of other funding options, notably from local chambers of commerce etc which should be considered, but for sheer simplicity crowd-funding looks to be the way forward.
It goes without saying that I am more than happy to discuss any of these points in more detail if you think that I can be of assistance. Please see our website for details of how to contact me
All Things Financial 