Before the credit crunch, bank loans were relatively easy to get, but that has all changed now. Banks are extremely cautious and take a huge amount of convincing to lend to businesses.
The biggest issue facing small and medium-sized businesses today is their access to funding – or lack of it. This article looks at some of the basics of getting a bank loan.
Criteria for bank loans
Firstly, what are the banks looking at when they review your lending request? It can be broken down in to several key areas, which are:
- The people – they look at whether the proprietors are of high integrity, honest and what their credit history is like for example. They also look in to how capable the main people in the business are.
- The purpose of the loan is an important consideration and they will look closely at what the funding is to be used for.
- The amount of the loan or overdraft. Is it the right amount, or possibly too much for what you really need? Conversely, is the amount sufficient, or will you soon be back for more?
- Serviceability – how the loan will be paid back. We will come on to this later.
- Security – how they will they get their money back if things do not work out?
- Profit – banks are not charities and will always want to make sure that their return is right for the level of risk they are taking.
Your bank manager will want you to be able to prove, beyond all reasonable doubt, that your business will be able to service the interest and loan repayments to ensure that they will get their money back. So, how do you do this?
There are several things banks look at when considering whether serviceability is in place, and it is often a combination of the following:
- Your accounts will show how profitable your business has been in the past – this is a key factor for them. However, there is a big difference between profit and cash, and the bank will always focus on the latter.
- Your forecasts and particularly your cash flow forecast is very important to your bank manager. This should be as accurate as they can be, supplying robust and very detailed assumptions, with supporting evidence if possible.
Banks will also use several ratios for evaluating serviceability, so it is worth having an informal conversation ahead of applying for finance. This can be done either directly with your bank, an accountant or by contacting us for support.