One of the most asked questions by business owners is “will the bank fund my business?”
The headlines of the past few years mean that many people still believe that there is little point talking to their bank, worried that they’ll be turned down. Whereas a good business actually stands a very good chance of being successful. You just need to know the bank is looking for.
They’re going to want answers to these questions:
- What do you need the money for? Will this borrowing enhance your business and is there a good reason to take on new debt.
- Have you got a viable and profitable business that has proven it can generate cash?
- Have you got robust forecasts for your profit & loss and cashflow? Do they stand up to scrutiny? You need to be fully involved in the forecast assumptions and really understand your own plan.
- Can you service the debt? I.e. can you repay the debt comfortably? This is the most critical area to convince the bank of.
- Have you got accurate monthly management accounts? Banks attach enormous and increasing importance to these– they want to know you’re monitoring your own situation, and so would know if things went off track.
- What security can you offer? They want to know what security you’re offering. They get upset when businesses expect to borrow without taking any of the risk themselves. If there genuinely isn’t security to give they can look at the Enterprise Finance Guarantee Scheme.
- What’s your contribution – they’ll want to know what you’re putting in. Depending on what you need the funds for they’ll expect you to be putting 20-30% of the money in yourself.
- Have you got a clear and well thought out vision for your business that your management team is bought into?
- Can you demonstrate you have a strong and credible management team with a good mix of skills and experience, and a proven track record of running a business? Have you’ve got staying power for when things get tough? They’ll want to see how you’ve run your business and bank facilities in the past.
- Are your HMRC payments and other creditors up to date?
- Have you got a Plan B? They want to know you’ve thought it through and planned what you’ll do if Plan A doesn’t work out. (Saying you don’t need Plan B won’t wash!).
Why do funding applications get turned down?
- The business case doesn’t make sense.
- Loss making business with no underlying viability.
- If your business isn’t generating positive cash-flows.
- Missing or poor financial projections and management information.
- Inability to service the new debt.
- Over enthusiastic financial plans with no Plan B.
- Weak and / or experienced management team with no track record.
- No clear vision for the business.
- No security available to give (although this can be overcome with the Enterprise Finance Guarantee Scheme).
- Business owners having taken too much cash out during the good years and not willing to put it back in.
- Personal lifestyle being funded from the business at expense of creditors.
- Not willing to put your own money in.
- HMRC arrears.
- An insolvent balance sheet.
- If your business or sector is in decline.
- A bad track record – unauthorised overdrafts, not communicating with the bank, not delivering on forecasts.
It’s fair to say that funding is harder to get than it was pre-crash. If you’re trying to borrow because your business is in trouble then you’re probably not going to get it. But if you’ve got a good business wanting funds to expand then you’ve got a good chance, IF you’re prepared to give the bank the information they need to make the decision.