Bank loans are an important source of funding enabling businesses to grow
For many entrepreneurs and small businesses, bank loans are an important source of funding, whether to fulfil orders, employ staff or finance patent protection applications. This guide uses a well-known acronym to help you fully prepare for a loan application and maximise your chances of receiving capital.
Banks take a gamble when providing loans. The more confidence they have in your ability to deliver, the more chance you’re likely to receive the capital you require. Naturally, presentation is very important. Dress and act like a professional and don’t be late. Interact well with your bank manager and come across as a likeable person. You must also show you are a capable business leader, with a good trading history and the ability to provide quality services to customers whilst also making a profit.
You must be unequivocal when telling the bank what you need the capital for and how you’ll be able to afford the repayments. There is no room for ambiguity. Many applications fail because the entrepreneur does not directly and clearly show how a profit will be made on the initial capital; bank managers cannot clearly how they will get the money back and therefore consider the application to be too risky. When presenting your case, it must be very obvious how you’ll repay the loan; use illustrations or bring in an accountant if necessary.
Your business plan must be professionally presented, logical and display knowledge of your industry and target markets. Business plans are important variables in whether a firm succeeds or fails; bank managers will be very keen to see your business plan is viable and can produce a return. Make sure yours is watertight; ask a professional to help you if required. Additionally, ensure your business model is solid. Bank managers must have confidence in your ability to deliver; if your business model is poorly monetised, irrational or hard to make sense of, this is going to dent your chances of getting a loan.
You must clearly show why you need the money and how you’re going to use it. There needs to be a good business case for the capital rather than simply because your business will benefit from increased revenue. You may have an order that needs fulfilling but there’s not enough liquidity in the business to do so. Alternatively you may need a specific piece of machinery in order to expand your range of products and services. Whatever the reason for the loan, you need to show that it’s a good reason, and one that will generate a return.
Bank managers want to know why you need the amount you’re asking for. In specific detail, you need to show precisely what the money will be spent on i.e. what you’re going to use it for. This is more than about telling the bank manager the purpose of the loan. You need to say why you’ve arrived at the figure you’re requesting and how it’s going to be spent.
Bank managers must be confident you’ll meet repayment terms or your application will get rejected. Be prepared to show substantial documentation relating to profit margins, cashflow forecasts and other key financial information. Bring your accountant – or consult them in advance of the appointment – if you’re unsure. Make sure you’re truthful; don’t exaggerate forecasts or profit margins. If your loan is secured, you may lose your property or business assets if repayment terms are not adhered to.
Ensure you’ve taken steps to protect yourself should things go worse than expected. You’ll need a backup plan to ensure you can still pay off the loan should you receive a less than satisfactory return. Take out adequate insurance where need be and take steps to diversify revenue streams to ensure you’ll still be making a profit should the loan capital fail to make a return.
Ready to apply?
Please see how to apply for a bank loan
for details of the application process.