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.
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.
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.
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.
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.
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.
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.
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’?