When most companies apply for finance, whether this is through a broker or direct to a lender, often they will send in the information required and hope for the best. But what if there is a better way.
What if you can get yourself lender ready and give yourself the best chance of getting the finance you need. Obviously, this can’t always be done. Business finance will often be required to help recover from a disaster of some sort. In those cases, we simply have to react and get the best facility we can for our client.
More often though, it is due to positive reasons such as growth, taking on staff or refinancing existing debt that will leave the business stronger moving forward. These events can be planned for, and so accessing funding can be planned for as well.
Here are just some of the ways you can make your business borrower ready and give yourself the best chance of getting the finance you need:
1. Think about the short, medium and long term.
The money you need now, may affect how you can finance your business in the future. If you take on a 5 year loan now, how will that affect your plans in two or three years’ time. Will the growth phase you have planned have to be pushed back due to loan repayments hampering cash flow further down the line? Will the security you need to give restrict the facilities you can look at in the future? If you take on numerous short term loans, will the repayments stop you being able to afford or access additional facilities in the future?
Preparing a robust cash flow forecast can help you to identify how your current borrowings could affect your long term plans. Discussing all this with your broker will also help them to identify the best form of borrowing for you.
2. Respect your bank account.
This phrase came up during a conversation with a bank manager. What does it mean? It means how you manage your account. If you have a bank overdraft or a revolving credit facility, don’t be hard drawn all the time (this isn’t what these facilities are designed for). Your account should flow in and out of the overdraft in line with your trade cycle. If you are bouncing direct debits or cheques, then talk to your creditors to see if you can change the payment date to better suit your natural cash flow. Your business bank account is not your personal bank account – if you don’t need Netflix, Disney etc. for your business, then your business shouldn’t be paying for them.
Bank statements are always scrutinized by lenders, with most lenders requiring 3 – 6 months of bank statements when assessing an application. With open banking becoming more and more popular with lenders as well, then this scrutiny is more detailed and accurate then ever before. Lenders look for behavioural patterns and want to see proactive decisions being made to bring account performance back into line if there are issues.
3. Speak to your accountant.
You may need to provide full accounts rather than the micro accounts filed at companies house. Depending on the age of the last filed accounts, you may also need to provide draft accounts to the last year end, or up to date management accounts. If you will need your accountant to prepare these, then speak to them about it first. Find out the time scales they will be working to. If your accountant knows they may be needed, they can plan with you. They will also be able to assist with the cash flow forecasts we talked about earlier.
4. Speak to your husband/wife/partner
Let your family know what you are planning. If you are securing a facility on a property which is jointly owned, they will need to consent and be onboard. They may also need to take independent legal advice (ILA). Most lenders will require a personal guarantee of some sort (you can read more about those here) so you need to make sure your partner is aware of this and supports it.
5. What will your customers think?
Many business owners associate some forms of finance with reputation risk. Typically this comes with factoring facilities but can be an issue with other types of lending. The opinion is probably a little out dated, but nevertheless still exits. If you are concerned by this, then you need to look at how your lender interacts with your customers and suppliers (if they need to). Most common across invoice finance and trade finance, lenders can often have a lot of interaction with your customers and suppliers, so you may want to speak to key partners before engaging with lenders.
As always, there are many things to consider, but the key thing is to plan ahead. Lenders are risk averse and so the better an application looks, the better the chance of securing the funding you need for your business, and at the best rates. If you have had issues, then lenders will take comfort if they see proactive steps have been taken to solve the issues. There’s an old adage that says “anyone can lend money, getting it back again is the hard part”. Lenders want to give themselves the best chance of collecting in their capital and interest/fees, and the easier you can make that decision for them, the better.