It’s common knowledge that raising finance is tricky at the moment. Banks are reluctant to lend, and even the Government’s numerous schemes designed to lubricate the flow of business cash haven’t helped much. Why is this? Surely your business is just as worthy as the next? Here we explore what factors the banks look at when deciding to lend.
You have to start thinking like the lender, not as the business owner you are. The two sides have different agendas, the difficulty is in getting a compromise between the two. So here goes…
“Can I have a Business Plan?”
This question is asked when you approach a bank looking to borrow money. The Bank ask this for numerous reasons, so please be aware of all of them before you answer. Your Banker wants to know where your business is heading, how you are going to get there and what will get in your way. However, they are also asking because they want to know you do have a business plan.
Please, don’t say “I can do a plan for you” or “I have an old one”, this simply shows you don’t have a plan for your business.
The same applies when the Bank asks for a Profit & Loss or Cash Flow Forecast – they want to know that you know. These reports are for your benefit as well as theirs. Those of us around in the 80′s will know that Sade thinks Your Love Is King, but she’s wrong – cash is king so, make sure the bank know you know where it is coming from.
Why do you want to borrow the money?
This may seem a simple question to ask but it is also one of the most misunderstood. An example of this could be a request like “I need a larger overdraft as my business is growing.”
Lets say the company in question has seen an increase in customers, needs more stock to meet demand and as such is running short of cash. They think they need an overdraft for this reason. They don’t.
The real reason is that their customers are increasing, but they had no new system in place to chase payment of invoices. They don’t need an overdraft but instead need to get their customers to pay them quicker.
The request to their Bank should have been “I need a temporary increase in overdraft as my business is growing, this has caused us to purchase more stock and our debtors are increasing as a result. We have introduced a new system to chase payment and this will see debtors paying quicker and older debts be collected in. As a result we need an overdraft for 3 months until the new system takes effect and we become more profitable.”
The real reason for seeking finance isn’t always obvious. You need to dig underneath any request for the real reason. This is what the Bank will do, the more thorough the proposal you give the better the chances of a positive outcome. The Bank will look for holes so try not to present too many of them.
“I want monthly reports,” or “I need to increase your charges”
This is not uncommon for a Bank to ask, especially given the economy is tough for them also. However remember – they ask for a reason. If the need to provide information is not part of your original lending agreement then ask yourself, why they are asking now?
Is your account up to or over its limit? Has turnover fallen? Is there another warning sign? In this instance you should not feel frightened to ask why. Ask the Bank to be honest and tell you why they are doing this, ask if they have concerns about you.
If a Bank is concerned about you then be honest with yourself, do they have real reason to worry or not?
When you provide information to the Bank ask yourself what it says about you. If the P&L will show a loss then meet with the Bank and explain it to them, say what you have done about it and why it occurred. Don’t leave it to them to draw their own conclusions!
What Is Credit Scoring?
This is a common question, and to realise how banks reach their lending decisions a basic understanding of credit scoring is important.
Credit Scoring is a statistical system which judges each proposal on a set of criteria derived from past experience. It doesn’t judge you on colour, creed, hairstyle or any other personality issue, it is purely evidence driven.
If you do have a string of CCJs or delinquent debts then expect the worst, but if you take guidance before applying there are still some things you can achieve. In whatever case don’t try and hide something which will be found out later!
The theory is that past performance is an indicator of future performance, which is pretty fair. But, lets consider the following example:
Abraham Lincoln and John F Kennedy were both Presidents, elected 100 years apart, both shot by assassins known by 3 names with 15 letters. Lincoln had a secretary named Kennedy, Kennedy a secretary named Lincoln, both were killed on a Friday, both succeeded by a man named Johnson (Andrew & Lyndon), Andrew was born in 1808, Lyndon in 1908.
So, statistically speaking there would be risk in being called Kennedy or Lincoln, having someone called Johnson around you, or being somewhere on a Friday.
However, we all know this is irrelevant. There are equally as many differences as there are similarities and it makes no difference who your secretary is or what they are called. But, if the same theory was applied to Credit Scoring then the similarities in risk may see your application declined.
So what should you do?
We had a client recently who ran a food business, it was about 50% eat in, 50% takeaway. His loan was declined because the bank considered restaurants to be a risk sector. Conversely, they considered the takeaway sector to be in growth. The issue here was in how he presented his business.
You need to be presenting the differences, the things that are relevant to the bank, but which make you unique. The key is in knowing what is relevant information, who wants to know what, and where to stress the importance of each part of your business.
Photo by Dan Moyle