If you’re a small business owner, securing a business loan can be one of the biggest obstacles you’ll face. Despite improvements in the economy as a whole, the UK’s SME sector is still suffering from a ‘credit crunch’.
According to Bank of England statistics, lending to SMEs actually dropped by £723 million in the first six months of this year – even while it increased for larger corporations. One of the problems facing small business owners is the strict lending policies put in place by banks. Bank lenders today often ask for a spotless credit record and large collateral requirements to safeguard against bad loans. These are requirements which many small business owners find very difficult to meet.
Before you apply for a business loan, it’s important to know what lenders look for and what you’ll be expected to provide. This will greatly improve your chances of acquiring a successful loan. It’s also important to know about alternative financing opportunities available for small businesses, in order to determine the type of lending that may be most suitable for your business. Forewarned is forearmed so read on!
What Loan Applicants Should Demonstrate
The extent of documentary evidence required by loan officers will depend, in part, on your type of business, size and track record, as well as the loan amount you’re seeking. It will also depend on the type of loan you’re applying for. Generally speaking, though, you’ll be expected to show that your business has a strong cashflow that is more than sufficient to cover loan repayments. In addition, lenders will want to see that you’ve got enough assets, financial reserves and personal collateral to handle business fluctuations. If your business is relatively new, you may also be asked to prove that you’ve had success running a similar venture in the past.
Prove Your Creditworthiness
As you can see, the list of evidence sought by lenders from an ideal candidate can be daunting for small business owners. However, lenders also need to make a profit so, even if you’re not able to tick all the boxes they require, they may be willing to compromise on some aspects of your application. The first thing to do is put yourself in the lender’s shoes – try to imagine what they would want to hear and see from you. You should have a good answer ready for any possible question they may ask in your interview. Ideally, you should talk to a financial advisor before submitting your loan. They will have assisted in preparing many such cases as yours and can help you to put together the best application possible.
Build a Business Plan
Creating a business plan that’s as detailed as possible is one of the best ways to prove your creditworthiness to potential lenders. Your plan should provide a detailed picture of your business financials as well as a realistic assessment of its prospects for growth. Ensure your figures and estimates are as accurate as possible as lenders will check your plan thoroughly. Ideally, your plan should be between 5-20 pages and have supporting documents alongside it. These documents should include three years’ worth of balance sheets (if your business has been running that long), as well as profit and loss statements, tax records, cash flow projections and details of your business accounts receivable and payable.
Clean Up Your Credit
To be considered creditworthy as a small business owner, you should have good business credit reports and scores. Make sure that you order a credit report from one of the three main business credit agencies – Dun & Bradstreet, Corporate Experian, or Equifax Small Business – at least six months before you’re planning to make a loan application. This will give you time to check through your details and have any errors corrected that might be adversely affecting your score. In addition, you may need time to improve your credit score based on what you find. For example, you may want to lower your outstanding debts if possible or at least spread them across multiple lenders rather than having a single large debt.
You may also want to consider using a commercial business credit building system. These are software-based platforms that guide you through the process of establishing business credit, including information on incorporation and registration, corporate conformity and how to get listed with the main business credit agencies. Some systems will allow you to check your own business credit report regularly, enabling you to maintain the best possible business credit rating.
Wherever you apply for a loan, ensure you’ve prepared as much evidence as possible of your ability to repay the amount you’re seeking to borrow. If, after surveying the evidence, the lender decides that you’re not a suitable candidate, don’t despair! There are many alternative finance opportunities for small businesses that can’t meet the strict criteria of traditional banks. These include merchant cash advances, lease financing, invoice discounting, peer-to-peer lending and more. These tend to be shorter-term loans with higher repayment rates but less stringent requirements for applicants. As such, they can be an ideal source of business funding when other avenues fail and also serve as bridging loans that can help build your creditworthiness.
There are many kinds of business loan available so review all the options before deciding on the most suitable source for your business.