In the current economic climate, getting the right business loan isn’t easy. Following the financial crash of 2008, banks are more wary than ever of handing out unserviceable credit and have considerably tightened up their lending criteria. So what factors will they consider when you make your application?
First and foremost, they’ll take a close look at your cash flow and ask themselves whether you can make repayments and interest payments on time, every time. For a stable, growing business this isn’t likely to be an issue, but start-ups are notoriously financially insecure, particularly if their clients take their time about paying.
Another important issue is the security you can provide, which will not only affect the bank’s decision to lend but also the interest rate they offer. They will also be quick to take into account any other loans or financial arrangements you have, as that will indicate how highly geared your finances are – and how likely you are to meet all your creditors’ demands if the business takes a downturn.
But there are several other criteria that are less obvious – though every bit as crucial in making business finance work for you.
Does your business plan add up?
You might not immediately think that the nature and quality of your business plan would shape your access to credit. However, a comprehensive, carefully costed business plan can make a huge difference, especially for a start-up. A well-drafted business plan shows you have a clear vision of the future and a realistic roadmap to achieve it, and will give lenders confidence that you are likely to make repayments diligently.
Your business sector can be crucial.
Similarly, the lender will carefully assess the sector in which your business operates. Some ventures are inherently more risky than others, such as internet start-ups, and will find it more difficult to secure affordable finance. Your sector will be a particularly important factor in assessing your creditworthiness if you are launching a new business, rather than refinancing an existing one.
How long have you been in business?
More generally, the length of time you have been in business could be a key driver of interest rates. Businesses that have been around for more than three years have demonstrated that they are resilient in the face of competition and changing markets, and this will almost certainly be reflected in the rates they are offered. Lenders are generally much more cautious in dealing with start-ups, particularly where the principals do not have proven track records as entrepreneurs.
How good is your personal credit rating?
For start-ups, the personal credit ratings of the principals can also be crucial. Should their credit histories be slender or inadequate, they may struggle to secure the finance they need and will probably be expected to put up personal collateral to back any loans.
However, as a young entrepreneur there is an alternative.
Flexible finance without all the caveats.
Alternative lenders have quite different criteria from banks and are able to provide finance quickly and flexibly. Emergency loans, typically from £20,000 to £250,000, can be delivered in as little as 24 hours and can prove invaluable in smoothing over cash flow issues. Meanwhile, asset-based finance is secured on your business assets, allowing for competitive interest rates, whilst invoice factoring and discounting allow you to raise money against your invoices as soon as you issue them.
Carl Faulds is a business recovery specialist. As managing director of Cashsolv, he offers advice and support to overcome cash flow problems and identify possible underlying problems that can be addressed to ensure a positive future for your business. Carl was former president of the Insolvency Practitioners Association, and makes regular appearances on BBC documentaries related to business recovery. Follow him on Twitter @Cashsolv.