The struggles businesses have when it comes to getting a business loan are well known for even well established businesses. But what if you are a start-up or a relatively young business? Simply put the climb you face will be steeper than the one confronting your more mature counterparts.

So what factors do banks take into consideration when assessing a business loan request?

If you are a start-up or a relatively young business you can increase your chances of success by better understanding how banks will assess your finance request. In fact businesses of all ages would also benefit from this.

One framework which sums up their approach is CAMPARI; get a tick for each aspect of this framework and you’re on the right track.

Character

First of all you need to understand that in the SME world the bank is lending to you, not your business… you are the business. It is you that can make or break your business and so naturally the bank is going to pay close attention to your character.

The bank will consider your age and health; the assets you have; how you have operated your bank account; and whether you come across as a person of integrity and honesty.

The key factor though will be the information contained in your Credit file. Do you have a clean record, or do you have a list of past loan defaults? For lower value loans the results from a credit search can be the main factor in you getting a yes or a no.

Ability

Closely linked to your character is your ability to make a success of the business. In terms of the sector you’re operating in do you have relevant experience? Do you have suitable qualifications which benefit you in this business?

What specific business skills do you have which will help control and grow the business? If you are missing key skill sets, what are you doing to close the gap? Do you have a clear plan for what you want to achieve?

All of these factors will help in assessing your ability to deliver on what you are promising.

Margin

This next part of the CAMPARI framework is not the definition of margin you will be familiar with. This is the amount of margin the bank will be charging you i.e. the interest rate and other charges they will apply.

The question for the bank is whether the interest rate and fees proposed is sufficiently high enough to compensate them for the risk they are taking.

Purpose

The bank will want to make sure that the purpose to which the finance will be used adds value to the business; the money lent has to assist you in moving the business forward and not just to get you out of trouble by paying off pressing bills for example.

The bank will also consider the sector you are operating in. Banks have sectors they are happy to lend to and sectors in which they are more cautious. The less favoured the sector, the tougher it will be to get what you want.

Amount

The bank does not expect to be advancing the total cost of the project; you will be expected to make a contribution. So what percentage are you putting in?

In terms of the project, are you asking for too little or too much? Either of these will put the bank off. The acid test is whether the amount you’re requesting matches with what your financial projections are showing.

Repayment

At the very heart of the bank’s assessment process is your ability to repay the finance you’re requesting. The bank will be looking at your Annual Accounts, your Management figures and your financial projections (Profit and Loss, Cashflow and Balance Sheet), all to confirm you can afford the repayments.

What about your past repayment track record? Have you had previous borrowings which were either paid back with no problems or where you struggled to pay? All of this is taken into consideration when assessing your ability to pay back.

Insurance

And lastly the bank is going to look at its insurance in terms of the security you can offer for the bank to fall back on should you fail to repay.

The issue of security is a very emotive subject. If you are looking to borrow a relatively small sum then the issue of security won’t arise as the bank will lend purely against your past credit history. However, for larger amounts the bank will be looking for assets which it can sell should you fail to pay.

The Next Step

As you can see there are a number of elements that the bank will look at when assessing your finance request. How do you stack up against the CAMPARI framework?

What actions do you need to take to improve your chances of getting a ‘yes’?

Getting a business loan is not as easy as it once was. During the ‘boom’ times you could get a business loan based on a few pages of information. Not today. If you are approaching your bank for finance you have to be prepared for a long list of demands.

We all know the 5 P’s when it comes to preparing for a big event – ‘preparation prevents particularly poor performance’ – and when it comes to approaching your bank for a business loan, this has never been truer.

To help them in assessing whether you are a good risk banks are coming up with an ever growing shopping list of required information.

To help you stay one step ahead of the game in getting a business loan here’s a list of what you can do in advance of putting your request in.

Prepare a Business Plan

Whilst you may think a face-to-face interview will be enough for the bank to understand you and your business, it’s not the case. You can’t take the risk of the bank not ‘getting’ your business. Writing a Business Plan takes away that risk; you’re in control of the message you want to get across.

A Plan does not have to be complicated. Here is a simple four-part outline:

• Where your business has come from and your background
• Where your business is today
• Where you want it to be
• How you are going to get there

Before you approach your bank with your business loan application, commit time and resources to writing a Business Plan; it may be less painful than you think and it will certainly give you a head start.

Bring Your Financials Up to Date

Your annual Financial Statements may not mean much to you but for the bank your numbers are the foundation of their assessment process.

If you have been lax in keeping your financials up to date speak to your accountant today. Your bank is not going to move an inch until it has a set of Accounts on the desk.

Prepare Your Latest Trading Figures

So you have your Financial Statements produced within three months of your year-end and the bank is happy? No! A few months is a long time in business and the bank will want up to date trading details in the form of Management Accounts. These are a mini version of your annual figures but more up to date – ideally to the end of the previous month.

In the current climate you should be preparing regular performance figures to assist in tracking areas for improvement as a matter of course. If you’re not, start today so when it comes to speaking to the bank you’re fully prepared.

Get Your Financial Projections Ready

Whilst the Business Plan sets out your vision in words the financial projections set out your future in numbers.

You will need a minimum of two years projections to include a forecast Profit and Loss, Balance Sheet and Cash Flow.

There are three reasons for the bank requiring projections:

• To be convinced that your business can service the level of debt you are requesting
• To monitor actual results achieved against the numbers projected with any deviation, acting as a warning sign
• To force you to think through your project in terms of numbers in order to take away the emotional element

Don’t shy away from this important task; you need to demonstrate to the bank that you are comfortable with the numbers aspect of your business.

Prepare a Personal Financial Summary

Banks will take greater interest in your personal financial position. In these tough times savings have been depleted, and credit cards maxed out to keep the cash flowing. The bank will want to know how your personal financial position looks.

Start by preparing an Income and Expenditure Report which lists your monthly household ingoing’s and outgoings. This is then backed up by an Asset and Liabilities Statement which summarises your assets – house, car, and savings – and your liabilities – mortgage, car loan, personal loan, and credit card.

But That May Not Be It …

This list is not exhaustive. Each business loan request and business is unique so the information asked of you will be tailored accordingly. Banks continue to be mindful of the risks they are taking on and one way to mitigate this is to obtain as much information as possible.

If you prepare your business loan application well in advance you can save a lot of time and stress so start your preparation now.

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