Brian Devlin, a relationship manager from NatWest, shares his views on what you should consider as a business owner or manager when approaching a bank for finance.
The only way our economy is going to grow is if our businesses grow.
Business growth means selling more, investing more, and hiring more people. There are costs associated with all of these and, unfortunately, access to finance is one of the biggest issues facing SMEs today.
The purpose of this article is to help summarise some of the things that you, as a business owner or manager, should think about when approaching a bank for finance.
It isn’t comprehensive, you’ll probably know some of it already and it won’t make a bad proposition a good one. Hopefully though it will help clarify what banks are looking for; reduce the time taken to get a loan agreed; and increase the likelihood of the bank saying Yes.
The First Step…
…Is probably to convince yourself that banks are actually lending money. Believe it or not almost every bank is more likely to say yes than no to an SME’s borrowing request. Last year the bank I work for made around £30 billion of new loans to SMEs. That's more than £1m every five working minutes - so the money is out there. Go and talk to your bank about your plans, your ideas and your ambitions – they do want to help.
Proper Preparation Prevents Poor Performance
Invest some time in preparing your funding request for the bank. Think about what you are going to say. Be able to explain the following clearly and simply:
- What the business does (in terms a layperson can understand);
- What your plans are and how they will be achieved;
- How much you want to borrow and how you will repay it.
The smaller the leap seems from where you are now to where you want to be, and the more clearly and logically you can explain the steps in between, the better your chances of success.
Honesty is the Best Policy
The bank will identify risks that affect the success of the plan and the business. Think about what these are likely to be - be honest… you probably know already. Be ready and able to explain how you can mitigate these risks.
While we’re talking about honesty – if you’ve had problems in the past (or if you’re having them now) be upfront with the bank about these. They’ll find out anyway but are more likely to want to help if you let them know on day one.
Depending on your proposition the bank may expect a level of cash contribution from your business or you personally. Banks (and other lenders) also generally take security for loans to businesses – they always have and probably always will. For the bank it ensures ongoing commitment by the business and it’s directors and it can help mitigate or prevent losses if things go wrong.
The security required will depend on the amount and type of borrowing and circumstances of the business. It might be pledged either by the business or by the directors.
Think seriously about what you (and possibly your family) feel comfortable with and take independent legal advice on the matter.
Information – Get Your Ducks in a Row
Banks are generally asking for more information than pre-credit crunch. So make sure you have this information available for them. It creates a great impression and speeds up the decision making process.
If you’re already trading a bank will generally want to see the last three years accounts, current management accounts, aged debtor and creditor listings, financial forecasts for 6 -12 months, 6 months bank statements and possibly some personal financial information. If you’re looking for a significant amount, relative to the size of your business, or are starting out in business they may ask for some kind of funding document (let’s call it a business plan).
If you are writing a business plan assume that the bank manager reading it has the attention span of a hyperactive goldfish. This should help you keep it brief, simple and to the point. Look again at point 2 above – all of these areas should be summarised on the very first page.
There are a lot of resources out there to help in writing a business plan – your bank or the Business Growth Hub can point you to some. But a few practical things you should avoid:
- Excessively detailed technical explanations
- Bad formatting and spelling mistakes
- Content that contradicts other parts of the plan and / or things that you say
- Massive file sizes if sending by e-mail
These seem obvious but are regular occurrences and they present you in a poor light – it’s like walking into a meeting with your jacket tucked into your trousers (yes I have seen this happen).
You don’t necessarily need to convince the bank manager that your business is going to grow at an astronomical rate or that you’ll have paid off your overdraft within 12 months. It may be more realistic to forecast stable, steady performance and to show an ongoing, and growing, working capital requirement.
Make sure the figures you’re quoting are consistent with your current performance (if you’re already in business) or the industry you’re in. So if your customers are currently paying you on 90 days and your projections show them paying on 30 days this will get spotted – or worse it won’t get spotted and you’ll run out of money.
The bank will sensitise your figures so have a feel for what your breakeven profitability and cashflow levels will be. Even better, think about what costs you would cut or not incur if the business does underperform against the forecasts. This will help demonstrate the robustness of your plan – but also help you be prepared if things don’t go as expected.
A Little Help from Your Friends
Involving a professional advisor such as an accountant may help refine and add credibility to your business plan, particularly to the financial forecasts. They should be used to dealing with banks and can advise on this or even sit in on meetings with you. This will mean an additional cost but a good advisor can end up paying for themselves – and more.
You will, to an extent, be judged on the quality of advisor you’re working with so do your research and get someone with a good reputation. If you're not sure who to ask your bank manager should be able to introduce you to someone suitable. A good advisor will challenge you and add value. Don’t just hire a yes man or the person who gives the lowest quote.
Computer Says No?
If, for whatever reason, the bank can’t help it isn’t the end of the story. In spite of what people tell you it probably isn’t because the computer says no – so get as much feedback as you can about the decision. Can the bank offer some of what you’re looking for? Are there changes you can make to the proposal that would make it acceptable? Is there an appeals process you can go through?
Make sure you ask if there are alternative sources of funding and advice the bank can refer you to – organisations like Business Finance Solutions, North West Access to Finance, North West Business Angels, the North West Fund and, of course, the Business Growth Hub can all potentially assist businesses that haven’t been able to obtain bank finance.
All of the major banks really are lending money to SMEs. I’m sure they would all like to lend more. Your job as an entrepreneur, business owner, or manager is to present your case as strongly as you can and make it as easy as possible for the bank manager to say yes. Hopefully the advice above will help you get the right result.
Thanks for reading.
Brian Devlin is a relationship manager from NatWest currently seconded to work with Business Finance Solutions and the Business Growth Hub. These views are his own and do not represent the views of NatWest, the RBS Group or any other person
You can contact Brian via the Business Growth Hub on 0161 359 3050
If you are interested in finding out more about the business finance products and services available through the Business Growth Hub, book your place now for the Financing Growth Conference, July 3rd 2012.