One aspect of a bank’s credit assessment process in reviewing your business loan request is how you are going to use the money lent to you. BLS’s Rob Warlow shares three key things you need to be aware of in how the bank will review your business loan application.

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’?

In this week’s Business Finance Bulletin Rob Warlow looks at the impact late payment can have on growth plans with a recent survey from Close Bros Finance demonstrating how it can hold your business back.

Rob also looks at how crowdlending platforms Funding Knight, ReBuilidngSociety and LendInvest have reached new highs and milestones as they continue to challenge the traditional High Street banks.

And in the Business Finance Tip of the Week Rob shares some thoughts in an interview he did on what a good Business Plan looks like.

In this clip from a live seminar hosted in Amsterdam Rob Warlow talks about how the current climate in raising finance is the new normal… we have to accept that raising finance will be a challenge for quite a while. With this in mind Rob explains how we have to adapt and why having an understanding of finance and a financial skill set is so important.

With the economy beginning to pick there is one barrier to growth that many business owners don’t see until it’s too late and that is lack of cash to fund future growth. Two recent surveys have highlighted the recurring problems UK businesses have when it comes to late payment.

The first survey from Close Brothers reveals that of those businesses experiencing problems due to late payments, 58% said that it impacts on their day-to-day cash flow management with 17% saying it has resulted in them reining in necessary spending. A further 15% say it threatens their ability to trade.

The impact of late payment is not just on poor cashflow but also in terms of the time taken out of the working day to chase up outstanding debts. Close Bros found that 17% of businesses spend more than 10 hours a month chasing late payers.

Despite chasing for payment it can often happen that the debt remains unpaid and findings from Satagom an automated credit control firm have revealed that 40%of firms have written debts off in the past.

As discussed in previous blogs part of the solution the late payment is to ensure there is a system and process in place for chasing bad debts. The Satago survey found that 77% of firms don’t have a person or a procedure in place so making the chasing of late payments even more difficult.

If your growth plans are held back by poor cashflow there are a number of solutions including invoice discounting, factoring, and spot finance which are detailed here – Cashflow Solutions.

Also here is a chat Rob Warlow had with Steve White of Thornbury Collections on steps you can take to avoid late payment.

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.

For regular updates on how to finance your growth plans, subscribe to our free weekly Business Finance Bulletin.

When looking at getting a business loan one aspect of your business you must be comfortable with is your financial performance… you have to know your numbers. And yet being able to read (and understand!) a Balance Sheet and a Profit and Loss is one aspect of running a successful business that eludes many business owners.

In this clip from a seminar Business Loan Services’ Rob Warlow looks at the importance of knowing your numbers when applying for a business loan or any form of business finance.

Asset finance is proving to be an increasingly popular way of purchasing assets. In this video BLS’s Rob Warlow, looks at why you should consider asset finance as a source of alternative finance in order to preserve cashflow.

In this week’s episode of the Business Finance Bulletin I look at the news that Paypal is launching its Working Capital programme in the UK to provide its clients with access to business loans. So if you’re a PayPal merchant this is for you!

The alternative finance continues to grow with news from AlternativeBusinessFunding that it has brought new alternative lender partners on board.

I also look at a survey from Beggies Traynor on small business investment plans and news from the Competition and Markets Authority about its plans to undertake a full review of the UK SME banking market.

The Business Finance Tip of the Week is taken from a live seminar I delivered for the ACCA on access to finance. In this clip I look at one source of finance which tends to remain hidden in the business… stock.

Thanks for watching and enjoy!

In this week’s Business Finance Bulletin I look at how small businesses continue to suffer from cashflow problems due to late payments. Surveys from the Asset Based Finance Association and BACS reveal the extent to which SMEs are being held back by late payment… find out how.

Poor cashflow has led to businesses falling behind in VAT repayments; with insights from specialist finance lender LDF showing how overdue VAT is on the up, this is one example of the impact of late payment.

In its quest to improve access to advice and finance I have news on the government’s revamp of its Great Business website and of £10m lent by the British Business Bank to Ratesetter for on-lending to individuals.

In the Business Finance Tip of the Week I have a guest tip from Steve White of Thornbury Collection Services on the excuses businesses trot out when they are overdue on payments.