One common challenge perceived by SME’s is general lack of support by banks. Business owners, as a result, tend to shun banks and go to great lengths to secure alternative financing for their businesses.
But given the aggressive marketing of loan products by financial institutions, one tends to wonder whether it is the banks that are reluctant to lend or it’s the businesses that are not well prepared to borrow. Understanding what the banks look for when assessing loan applications can significantly increase the possibility of accessing funding.
Below are five issues you need to look into before approaching any lender.
1. Have well prepared historical Financial Statements.
The lender relies to a great extent on demonstrated financial performance of the business to assess your ability to repay the loan.
Apart from having 2-3 years’ financial statements, take time to understand what they portray of your business. Has the company been making profits? Does the business generate sufficient cash flow to repay the loan? How strong is the company’s balance sheet? Seek the help of your accountant or financial advisor if necessary.
2. Demonstrate your plan
Every lender wants to know what you intend to do with the loan and its impact on the business. You should prepare a formal document (Business Plan) outlining your plans, how the loan will impact on the business and the plan for loan repayment.
3. Have a Cash Flow projection
The loan will be repaid from future cash flows generated by the business. Project, for the duration of the loan, if possible the expected business cash flows. Remember to factor in the projection the impact of the loan in terms of additional cash flow generated and the loan repayments.
4. Have a Contingency Plan
Even the best laid plans sometimes go wrong. Think through and address on your business plan the alternatives of ensuring the loan is repaid even if things don’t go as planned.
5. Apply for the right Loan Product
Different loan products serve different business needs. For example, Asset finance for purchase of equipment and Overdraft to short-term working capital. Assess your financing need and go for the right product.