The thought of applying for a business loan can be quite daunting. However, if you are properly prepared for it, the whole process will be much smoother and your chances of getting the loan will be greatly increased. In this blog, we outline how to apply for a business loan.
What accounts and reports should you provide the bank with?
If you are already in business then the first thing the bank will ask for is historic accounts. These are normally the last three completed years. The bank will also want to see the latest set of management accounts for the current year. It is useful to extract the earnings before interest, tax, depreciation and amortisation from all these figures – commonly known as the EBITDA calculation.
If there are variances in the accounts then it is good to provide a commentary as to why these variances occurred. Remember that your bank manager might know about these, but the loan application may well be passed to a credit committee who doesn’t know about them. So, to have commentary on the figures presented at the start of the application is good.
Provide the bank with Aged Debtor reports and Aged Creditor reports so that they can see how well these important areas of your business are being managed.
If you have any HP agreements in place, make sure that you give these to the bank, preferably with a summary showing the amounts payable each month and the end dates of each agreement.
What questions will the bank ask when assessing your business loan?
It is likely that the bank will also ask you the following, more general questions:
- What challenges has Brexit presented to the business?
- How sustainable is the business?
- What steps has the business taken to ensure its Cyber Security?
What do the directors need to supply for the business loan application?
The directors should be prepared to provide a statement of their personal assets and liabilities (normally the value of their house and the mortgage), and their income and expenditure. This enables the bank to assess whether or not the business can service the directors’ lifestyles.
What projections are needed for the business loan application?
The bank may want to see projections for at least one year, possibly longer depending on the amount that you wish to borrow. These projections will include:
- A detailed cash flow, usually by month.
- A profit and loss account.
- A balance sheet.
To accompany the projections, the bank will want to know your main assumptions. For example, what percentage increase have you applied to sales and why? And, how many extra employees will you need? It is essential that the projections are coherent and consistent. So, if you are projecting for increased sales then the likelihood is that your trade debtors will increase as well. Will you outgrow your premises? If so, then increased rent should be included.
You should also provide commentary on the projections which gives more detail. For example, you should explain why new equipment is being bought, why you need a new website design or a new payment platform for internet sales, the number of extra employees required per £X increase in turnover, or perhaps a reduction in transport and packaging costs. If any line in the projections is significantly different from the historic figures then an explanation is required.
The other important factor to consider in projections is how sensitive they are. If a small drop in projected turnover means that you would exceed your borrowing limits then the bank is not going to be too happy. If possible, it can be really helpful to provide the bank with the projections that you hope to achieve and also a “worst-case scenario” set of projections to prove that your business would still be viable. It is important to talk to the bank as different business sectors require different debt serviceability.
It is so much better to supply the bank with commentary at the start of the application rather than to wait for them to ask for it. It shows that the figures are well thought out and, in writing the commentary, it may well help you to identify areas that you need to adjust in the projections before they go to the bank.
At the time of writing this blog, many businesses may find it easier to obtain a Bounce Back Loan which has become available due to the Covid-19 pandemic. If this is the case, you can read our blog on obtaining one of these loans. Otherwise, we hope this blog on how to apply for a business loan has been useful. If you are looking to apply for a “normal” business loan then please do not hesitate to get in touch so that we can chat through your specific circumstances.