August 8th, 2016 / Insight posted in Blog

Planning for a small business loan

In times of financial difficulty, it can be incredibly hard to get a loan for your business. Banks are suspicious and wary of giving out  loans, and there seems to be an innumerable amount of hoops to jump through. By following these guidelines, you may increase your chances of getting a loan, and ensure the loan is right for your business.

1. Ask questions

It is important to know if you will qualify for a loan, since being refused one will look bad for your business, and make it harder to get one in the future. Start by asking what kind of credit scores the bank wants (800 is ideal but usually banks will start considering people at about 680 – depending on the credit score provider). It will also help for you to do research into the specific requirements that bank has for people getting loans. As well as this, it is important to know the specifics of the loan itself (what documents will you need? What is the interest rate on the loan?), before you are committed to anything and unable to back out.

2. Know how much you actually need

It is important to know exactly how much money you actually need. Do this by creating a cash flow diagram, bearing in mind there are different types of cash flow you will need to be aware of, such as: free cash flow, levered and unlevered cash flow and discounted cash flow. Take some of these into account so you have a real understanding of the viability of your business and what it is you need the loan for. You do not want to ask for multiple loans to patch up holes in your business’ financial structure, as this will ultimately just land you in debt. This will also help you in getting the loan as the bank will likely want to check you have a cash flow secure enough to ensure you pay it back.

It is essential you know exactly how big the loan you need is. Don’t go anywhere near a bank until you are absolutely certain of the number you want, since the bank will likely ask you questions relating to the loan, and its’ purpose, and any hiccups will look bad on you. Often people underestimate the loan they need, since they think the bank will be less likely to give them a big loan. It is your job to make sure your plan is watertight, so the bank understands what you need the money for, and knows you have thought this through carefully.

Consider the nature of the loan: are these one time costs or on going? Are they fixed or variable? It should be noted that loans that just cover holes in your business’ financial plan are not a good idea, and really loans should only be considered for expansion and ventures that can’t be covered by your current cash flow.

3. Have a solid business plan

It is important that you have a well-prepared business plan, and deliver it well to your bank manager. Bankers give loans based on many variables, some of them personal, and will often take a borrower’s character into account. When you are delivering your business plan, you need to make sure you come across as someone who is confident in their business while understanding the complexity of finance; in short, you need to be thorough.

Some banks have packages to help you write your business plan. Information  that banks will want to hear about in your business plan are: the cash flow of your business (so they can count on being paid back, with interest), how you will manage the loan, the collateral you will give in the case of not paying back the loan and any co-signers. It is important that you pre-empt the things banks will ask, as this makes you look more prepared. As well as this, since banks are naturally conservative, pre-empting when you will need your loan, so that you can ask for one at a time when your business is quite financially stable. If you ask when your business is at its weakest, you are less likely to get the loan, and may be overcharged on interest if you do get it.

Do you have any experience of what to look out for when applying for a loan? Tweet us @kingstonsmith and join the conversation.