At the moment finance is relatively easy to obtain but this will not always be the case. So many lenders are advertising their services that it can be quite confusing. To find the best offers it is always good practice to shop around and compare them. Competition in the finance market is huge. Many different rates, conditions and deals are available therefore it can be most difficult to choose the one most suited to your needs. Obtaining professional advice is not always easy. Many financial advisers and managers have a vested interest in arranging a particular loan in order to obtain a commission from that lender. To some extent the same thing can be said about banks. Each branch is rated on its loans and non-banking product sales.
If you are having serious doubts about which loan to apply for see your accountant and ask for his unbiased recommendation. No matter where you go for finance the lender will need a lot of information to help decide if it will be possible to grant a loan. If you apply to your bank they will already have considerable information about your business affairs but will still require detailed information concerning the purpose of the loan.
If you need a loan to finance a temporary cash flow problem, carry out improvements to premises, purchase new equipment or for any other business reason, the lender will require information on how this money is to be spent and what benefits it will bring to your business. More importantly, the lender will need assurance that you are in a position to repay the loan over the agreed period at the agreed terms. There is no point in going to a lender, cap in hand, with no preparation to secure an advance. You will not be successful.
You will have to provide detailed information to the lender that gives a true picture of the viability and financial state of your business. This will enable the lender to assess your request, analyse the proposal and to discuss the matter with you. The following information is the minimum that will be required by the lender:-
The reason for the requested loan.
How you think the loan will improve your business.
A copy of your Business Plan.
How you propose to repay the loan.
The period for which you require the loan.
Details of any other loans or overdrafts.
The historical profitability of the business.
Copy of your latest Year End Accounts.
The lender will most likely require some kind of security against the loan. Other questions about the business may be asked. For instance, is the loan really necessary? Is your historical percentage of profit acceptable? Plus other searching questions. You must be fully prepared for these questions and have all the information available.
When applying for finance, or, for that matter, any other dealings with financial institutions it is always good policy to be confident, in control and fully conversant with all the details. Always make sure you know all the terms of the loan agreement before you finally commit to it. If in doubt, question the terms and conditions to see if they can be changed or amended. Another important point when applying for a loan is to constructively and critically analyse why you need the money. The questions to ask yourself are:-
Can I manage to do what I want without having to increase my borrowings?
Do I really need to carry out the plans at this time?
Is there an alternative I can use?
Will it be better to wait until I am in a more secure financial position?
Will a reorganisation of the business enable me to carry out my plans without further borrowing?
When you borrow money, as everyone knows, it costs you money, even if you pay it back fairly quickly. It is obviously more sensible to avoid applying for a loan if all the above parameters cannot be met when you're considering the possibility of business loan.
There are times where loans can be extremely valuable and useful, especially in the case of large businesses. A small business is quite different and extra caution should be used before going along that route. Paying interest to a lender decreases your profits and could be better used to build up your business, at the same time reducing your overheads.
People in small businesses rarely have time to carry out such detailed work in preparing documentation for a loan application due to other pressures. If you feel that a loan is the only way forward you need to have all the information at your finger tips when you first apply. It may be possible for your accountant or some other qualified person to do it for you, but this is not always practical.
Michael Russell
Your Independent guide to Finance