One of the challenges, albeit positive, of owning an SME that is doing well is that there comes the point when the growth requirements outstrip the available capital. Another way of saying this is that the business’s organic growth is insufficient for the market’s demands ‒ and bravo to you for achieving this challenge.
Even with a healthy cash flow to sustain any growth, your careful planning may reveal that an external injection of cash needs to help you take that leap to the next level.
While there is quite a bit of jumping through hoops, business loans are generally the option used by small to medium businesses to facilitate their growth. However, there has been a growing trend of small to medium business owners securing funding from alternate sources over the past ten years. Often seeking market disruptors that traditional financial institutions are not comfortable with, these alternate investors have broadened the availability of loans resulting in financing being available to a diverse range and types of businesses. A business loan can bridge extra headcount costs, finance buffer stock, facilitate the renovation of an existing office or an additional outlet, or affect the purchasing of other production equipment. This business element could be critical to the success of your next growth phase, but how do you go about applying for it?
We have collated a combination of advice and a process to help you apply and win the funding your business needs for you to soar to the next level. This exciting and helpful compilation includes:
- How to create a business plan
- Assessing sources of funding
- Assessing the quality of your application and the chances of its success
- Checking that all the document boxes are ticked
- Evaluate the loan offer on the table
Before diving deep into the steps to follow, let us pause and consider the areas of caution that you should heed before putting yourself into a business debt position.
What is business funding?
Business funding is relatively small loans (relative to the business size and potential) that are solely to grow the volumes, earnings, and, ultimately, the profits of a business. A quantified growth plan usually justifies the funding, or it can simply be bridging finance. The required, or mutually agreed amount, is provided by a financial institution or a conglomerate. It has different payback options based on the risk appetite of the lender and your type of business. The repayments will include interest and the total payback period is a finite period of time. This is different from a silent partner investor who owns a portion of the company and regularly receives dividends as their only source of earnings on the investment made.
Funding options
Business funding is vastly different from a home loan or a general loan because they are structured to service a business’s growth or stability needs. Each source of funding will have:
- Different contract wording
- Different risk appetite (amount of money offered)
- The interest rate (and hence total debt)
- Length of the loan period
- Qualification criteria (e.g., some funding is for women only or fairtrade businesses only)
Due to the variances per funding option, you must assess the funding partner carefully and make sure you are selecting the right loan for your business and your business needs. You must also evaluate your loan request and commitment requirements against your business style, industry and market segment, and risk appetite.
Business loans are not only available from the private sector, e.g., banks, credit organizations, brokers, alternative funding specialists, and private lenders, but also state departments. While there are the above-listed differences between funding partners, commonalities are vital for improving your chances of successfully landing a business loan.
We’re ready to dive into the exciting process of planning, collating, and preparing for your business loan application that will take your business into a whole new experience. Exciting times! Let’s go.
The requirements to get a business loan
Business Loan Step #1
We realize that this is no one’s favorite step, yet it is arguably the most critical step. It is essential because most funding committees insist on it being created, but it is also a precious exercise for you to go through. If you approach this step with commitment and honesty, you will get a good image of your company and future projections. Therefore, this plan will reveal what size of a loan you will need, your ability to honor the loan, and the type of loan you need. Most formal banking institutions and historical lenders ask for a business plan. But if you are looking for seed funding or investor buy-in, you will require a business plan. The more business plans you prepare, the better you will become at creating them. They should be an honest representation of your business and status, or you will be misleading about your business’s need for the loan and the ability to honor it. As you can probably deduce, you are theoretically reducing their risk by submitting a business plan to a lender. And what comes with lower risk? Lower interest rates. Therefore, it goes without saying that there will be a higher interest rate because alternative lenders do not usually require a business plan. You will, in the majority, only need to fill out an online form and submit it. When you receive their offer, scrutinize it for:
- Their rights to call in the loan
- The implication of a loan call-in
- The interest rate
- Their fees
- The total amount due by the end of the loan
- The penalties for paying off the loan earlier
The Business Plan Factor
Although we have pushed it, we are pushing it again – the business plan. Underestimating its importance will hamper your success regardless of whether you are applying for a loan. Most businesses that fail within the first two years do not have a business plan. Among dozens of other institutions, two leading universities in the USA conducted research on business failure and causes. The research statistics revealed these percentages, measured from the startup date:
- The general percentage of businesses failing within three years 44%
- Ringfenced to technology 63%
- Retail 53%
- Percentage of businesses failing within year one 70% to 80%
- Of the remaining 20 – 30%, rate that falls within the next four years 50%
The two universities, and the plethora of other organizations doing this research annually, all concluded the same number one cause of failure: a lack of a business plan.
Shape Your Business Plan
The business plan step is strategically positioned first so that you can shape it based on the submission you will be making. When submitting a CV for different positions, you don’t offer a generic document ‒ well, if you are, here’s a tip, you shouldn’t be! Your business plan is your company’s CV, so:
- Do your generic business plan
- Ascertain why you need a loan
- Define the amount you need
- This will inform the period of the loan
- Research and select the funding sources that give loans for those types of needs
- Shape your business plan to suit the decision-makers. Don’t lie; highlight the points they are interested in so they don’t have to wade through loads of info to find it.
Business Loan Step #2
Be prepared to conduct thorough research into the diverse range of funding options. Don’t apply “willy-nilly” nor rush the signing because you are desperate to get started. You might find yourself tied into a loan that is wrong for your business or too difficult to honour. In addition, a shotgun approach seriously damages your ability to get the loan you want. Each unsuccessful bid harms your credit rating, so make sure:
- What you want to use the loan for fits the criteria of the lender
- Your business fits the requirements of the lender.
- All their other criteria are met.
Here is a checklist for you to work through when assessing the best fit with a funding partner. Get these details from them before you apply for the loan:
- What terms do they usually offer? This will show you the repayment amounts and the total amount, including all the interest. Can you honor this?
- When do they expect you to make the repayments? Some ask for small daily refunds, others prefer a payment per week or month, and some may even look at quarterly. This requirement affects your cash flow so ask your accountant to comment.
- Do they have excellent reviews about their customer service desk? When there is a problem, or something has confused you, will their customer support help you? Do they have a reputation for explaining the contracts, or do they use much confusing legalese?
- Will you have access to a knowledge hub that enhances your ability to run your business well? Any mentorship?
- How soon will the money be in your account after the loan is approved?
- Does the lender offer a soft search option to let you know if you might be qualified without affecting your company’s credit rating?
Time to move on to the next step.
Business Loan Step #3
If you are new to applying for business loans, which is why we think you are reading this, you may not know how to ascertain if you meet the eligibility criteria. As mentioned above, each funding partner has different standards. While some will be similar criteria, there can also be very different ones, e.g., they only fund companies that have all-female C-suites. Thus, while there is no industry-wide standard with a template that everyone can complete, the qualifying criteria that all lenders frequently require are:
- The company’s
- Credit score
- A historical record of repayments
- Trading record, i.e., the highs and lows
- Total income
- Net returns after tax
- Various assets
- Any security that can be offered
- The criminal record of directors
You can assess credit scores online; however, expect to find minor variances depending on which site you use to evaluate it.
Business Loan Step #4
We have said it earlier, but it is worth repeating – don’t rush. Have all your ‘ducks in a row’ before making your first submission. Get all your documents in order with verification by your accountant. Errors and omitted data will hinder your loan application or cause it to fail. Traditional funders like banks usually have a lower risk appetite and have tougher criteria, a longer application process, and lower interest rates. Conversely, alternative funders have a higher risk appetite, less ominous criteria, and a faster application process but have higher interest rates. You can expect to be asked for these items or information:
- The full details of the owners of the business, including proof of fixed abode
- A scanned copy of the owners’ passports, including the photo
- The business plan
- Scanned or soft copies of HMRC submissions for the company and the owners
- Bank statements for the company and the owners
- Year-end financials
- Lease documents, if relevant
- Franchise contracts, if relevant
- Articles of incorporation, if relevant
- Other business documentation
Business Loan Step #5
If you have made it through the approval process and have been successful, expect to receive communication from the funding partner regarding the final terms relating to the loan that has been awarded to you. If you have been successful with a few funding partners, you will need to dedicate some time to rate the offers against each other. Carefully select the one that meets your business needs and abilities. Here is a checklist to help you with this review:
- When will the funds be transferred to you?
- When is your first repayment required and the others after that?
- What is the impact of the interest on the total capital amount due?
- Will the interest rate follow the market or be fixed?
- What are the total fees due?
- Have you been asked for surety?
- What is the cost of early settlement?
- What is the cost and repercussions of a missed or delayed payment?
Congratulations, you now have a loan that suits your business and that you can honour. All you need to do now is to be the brilliant business person you are!