Preparing to Take a Business Loan

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Kylie Greeff
13th July 2017

“Give me six hours to chop down a tree and I will spend the first four sharpening the axe.” ― Abraham Lincoln

All businesses, at one time or another, will likely need to raise finance to grow or fill in a temporary gap in cash flow. Raising finance is easiest done by taking some time to first prepare both yourself and your business. Following some pointers and planning ahead can save you both time and money – and probably a lot of headaches…

1. Get ahead of the game

Maintaining monthly management accounts and cash flow forecasting will allow you to better anticipate and identify where and when you might need to raise finance. By giving yourself the tools needed to anticipate any difficulties, you’ll be able to put your business in a stronger position when approaching finance providers. You will likely be required to produce a certain level of forecasting and accounts; having these to hand will allow you to progress any application quicker.

2. Determine how much you need

Using your forecasts, determine how much you will need to achieve your goals, the reasons for raising funds. Approaching a lender asking for ‘as much as you can get’ will not inspire them to support your business.

Set out exactly what you need the funds for and how and when you plan to use them. Make sure that you also work in a little breathing room to ensure that you can withstand a few ‘bumps in the road’.

3. Know your credit score

Lenders are all likely to look at either your personal credit score or your business credit score, or in some cases both. If you’ve planned ahead you may be able to improve these scores. Either way, as a business owner you should always keep in mind your credit scores, understand what actions affect your credit score and amend your practices so as to most positively influence these scores. Managing your credit score takes long-term planning and conscious decision-making. Keep this in mind.

4. Research your options

Over the last decade, the number of finance options for businesses has surged. A bank loan is no longer the only option available to business owners. But with so much choice available, it can often be confusing and difficult to decide what is the best option for your business at the time.

If you’ve planned ahead, it will be much easier for you to determine what kind of finance you need, whether it be a loan, invoice financing or an equity fund raise. Giving yourself time will also allow you to research the varying rates and fees associated with the finance, as well as the varying requirements of finance providers.

Researching your options is very important when deciding to raise finance; failing to do so could result in your business being burdened with a high interest rate or unexpected costs, which could put your business at risk in the long run.

5. Consider supporting your loan

Whilst there are many unsecured finance options available, lenders will often offer you more favourable terms and interest rates if you are prepared to have ‘some skin in the game’. Consider whether you are prepared to give a Personal Guarantee, a debenture (security on the assets of the business) or even a charge on a property that you or your business own.

At rebuildingsociety.com, offering security could see you benefiting from as much as a 5% reduction on your starting interest rate, a significant saving over the course of the loan term. Eg. On a £50,000 over 5 years, that’s a saving of £2,500 a year, £12,500 over 5 years!

6. Sell yourself and your business

When applying for finance, you should be able to eloquently and precisely explain why your business needs the finance and why you and your business are a good bet for the lender. No matter how good your finances, if you are not able to convince the lender that your business is worth supporting – and back up those reasons – you will struggle to raise the finance. Be available and engaging with the lender; answer their questions directly and confidently. Talk about your experience, and do not embellish the truth.

7. Know your business

Many business owners are usually able to eloquently and passionately explain what their business does on a day-to-day basis, but are generally less able to communicate key financial aspects of their business. When raising finance you are likely to be asked detailed questions about the finances of your business, and you should be able to answer these easily and confidently.

Be prepared to answer questions such as:
- What is your turnover/revenue? (Know the difference between revenue and profit!)
- What is your gross profit?
- What are your operating costs?
- How long does it take you to collect payment from your customers?
- How much profit do you really make on your 10 largest customers?
- What is the real cost of your product or service?

8. Don’t forget the small print

Always read the small print before committing to any finance. Failing to do so could result in your business being burdened with unexpected costs or restrictions.

A few key points to consider:
- What will you get in the bank on completion? Research the way fees are charged.
- Is there a charge for early repayment?
- Is the interest rate fixed throughout the term?
- Can the loan be called in unexpectedly by the lender?
- Are there any performance clauses or obligations on your part other than repaying the regular installments?

All in all the best thing to do when is raising finance, is to be prepared! If you know exactly where and how you can raise the finance you need when you need it and have prepared your business for a lender to look at it, raising finance will be a much simpler and quicker process.

If you are a business owner, and are considering raising finance, get in touch with our business team, who will be happy to talk you through your options and point you in the right direction.

Contact us: 0113 8150 244
Email: borrow@rebuildingsociety.com

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