7 Steps to Business Finance
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The Information "They" Didn't Want You to Have
The Credit Crunch is showing no signs of easing up, and with the current turmoil over the Eurozone, there has never been a harder time to obtain a business financing loan.
When you need funding for business purposes, you need the help of an expert, and small business start-up specialist shares some of the secrets needed to get that funding.
From our experience we have come up with a "7 steps to Business Finance" resource to help the Small and Medium Enterprises (SME) work toward acheiving this.
Take the First Step
How do you feel when your bank manager won't help you? You've built your small business up and have survived the worst ever UK recession for many a year. You may have orders to finance. You may even want to buy new equipment or move to more suitable premises.
Your business is making a profit but all you get is a "No" from your bank. We sadly see this scenario every day; but don't give up.
This article will help in planning and understanding the secrets of how the Banks think and by following these seven steps this will increase your chances of getting the finance you need.
Don't forget the banks make money by lending it out and your bank manager will be targeted to do so!
1. Do your homework
Before you put your request in to your bank make sure you know who your bank manager is. Some managers have 500 clients and they may never have met you. Help them out - most of them are human!
You need to ensure that the records that the bank have contain as much information as possible to assist in their decision making process and to increase their awareness of your business.
Even if you have never borrowed from them, send them a copy of your annual accounts each year with a letter explaining how your business has performed and what your plans are for the future. This shows to the bank that you care about the relationship you have with them and they want to be liked! Seriously it will help the manager present your case.
Ring your manager and tell them you are considering finance in the next few months and what do you need to do to obtain it. Tell them what you want, what it is for and how it will be repaid.
Some banks have pre-approval limits set up in advance. Ask them if they have one allocated to you.
Make sure your manager understands your business!
If they don’t, provide a company brochure, direct them to your website or detail it in writing so they can keep it on your file. They have to sell you to the underwriter so they need to understand your business.
Ensure they understand the market that you are operating in, the type of clients that you want. You never know they may even give your business!
If you don't feel you have a good relationship then change your manager or your bank.
If you need finance to purchase new equipment don't ask the bank for an overdraft.
An overdraft is for day-to-day working expenditure. It is there to pay your bills, wages and stock before your customers pay you.
If you put a new vehicle through your bank account it will affect both the day-to-day cash that the business needs and as all banks asses the conduct of your account, this will impact on future borrowing decisions.
2. Consider help
If you outsource your bookkeeping, HR etc then why not consider using a commercial finance broker to assist you getting the business finance that you require. Their role is to identify the right type of finance for you and do all the work on your behalf thus freeing your time up to run your business. They will also know which lenders to approach and how to present your case in the best way. It’s not just the Banks, there are many other lenders supporting businesses like yours that you will never have heard of.
Questions to ask;
Do they have a Consumer Credit Licence? If not why not? It can be illegal not to have one.
Are they on the Data Protection Register? If not is your information protected?
Are they a member of the National Association of Commercial Finance Brokers? A trade association set up to protect you.
3. Prepare yourself
Even if you have been with your bank for years they will still do a credit reference search on you and the business. If you're a limited company they will also do a Directors search and will look at any other company that you are associated with.
Do the searches yourself to ensure that there is nothing on the reports that is inaccurate and may go against you.
If the bank feels that there is pressure on the personal account they will be concerned that you won’t be able to repay the business finance.
4. Prepare your business
Any lender, existing or new, will be looking at how your bank account is conducted .If you go overdrawn without arrangement this will seriously affect your credit score.
- If you get paid cash make sure it goes through both your books and whilst your bank charges may increase, it makes HM Revenue & Customs happy and will improve your bank credit score.
- Have up to date signed annual accounts by a qualified accountant and current management information.
- Have a list of what you owe and how much your customers owe you.
- Pay your VAT, personal tax or PAYE on time.
- File your accounts on time.
Do you have a business plan? If yes then great, but please update it on a regular basis. Don’t do it and file it. Read, share and update it. Two or three pages can be sufficient. You get brownie points for having one.
Have 6 months personal and business bank statements if your account is elsewhere.
Stay in credit or well within your overdraft limit and monitor your account. Sign up for text alerts to warn you about a low balance. I’ve seen requests for finance declined over a missed phone bill.
"It's not 2007 anymore. The banks were almost giving money away and the cost to the banks is now much higher and this is reflected in the interest rates you will pay."
5. Look at alternative forms of finance
There is more to life than a bank and its overdraft or loan. You don't necessarily have to go to your bank to get the best deal and by talking to an independent commercial finance broker they can compare all the main lenders in the market.
- Asset Finance or leasing for vehicles and equipment - as it can be more tax efficient. Ask your accountant, they will tell you.
- Stock Finance - If you have an order from a major supplier and you do not have the funds to buy the goods to fulfil that order. The banks don’t offer this but other lenders do.
- Invoice Finance - so you can get cash against your invoices within 24 hours.
- Peer-to-peer lending - which is relatively new in this country. But be careful like anything new, lots of companies out there and you need to ensure that you get the right one for your business.
These are the lenders that are keeping a lot of businesses alive and there are many other types of finance.
A bank typically will require security if the amount that you borrow from them is over £15,000. When I say security I don't mean a personal guarantee. If you are a limited company and your only asset is stock then the bank will require the directors to sign guarantees to tie them in personally. If you don't want to do this then don't approach a bank because you will be wasting your time. The most common items of security are;
- Debtors-the money owed to you,
- Property owned by the business or directors. Yes they may want your house. Make sure you are OK with that in advance but there are alternatives,
7. Be realistic
It's not 2007 anymore. The banks were almost giving money away and the cost to the banks is now much higher and this is reflected in the interest rates you will pay. The market has changed beyond recognition. Security will be required so accept it. It may be as simple as the asset you are buying. Not every lender wants your house.
Be careful about the additional services that the bank may insist that you have in order to get your loan e.g. life insurance, protection against interest rate increases. By all means consider these and if you feel that they are required get independent advice
You will find that the products are normally better in the open market and at a lower cost to you.
I won’t say good luck because it’s not a card game. 'Failure to plan' is 'prepare to fail' and if you need help then we would be pleased to assist.