Five top tips to prepare your business for lending
Written by Mike Lowe, regional executive for UKSE’s West Midlands arm.
With the economic headwinds making conditions challenging for companies it is essential you prepare properly before applying for a business loan.
West Midlands small to medium sized companies (SMEs) face a great deal of uncertainty, plus the rising costs of borrowing and the impact of inflation.
It is perhaps inevitable that investment has declined in recent times. Last year, £16.7bn of equity was invested into the UK’s smaller businesses, a decline of 11 per cent compared to 2021, according to the British Business Bank Small Business Equity Tracker.
For those of us in the business finance sector, the message is clear that there are still a wide range of options for firms to not only survive but plan for growth and future success.
UKSE is a Tata Steel subsidiary offering strategic loan and equity packages of up to £1m to generate growth, create local job opportunities and bolster the economy across Birmingham, the Black Country, Coventry, Staffordshire and Shropshire.
With this in mind, we have put together five top tips to help companies get themselves fully fit for entering the loans market to secure their futures.
1. Have a strong business plan
Many companies may trade without a structured document to work off, but a strong business plan is essential, especially when you are applying for a loan.
No matter where you are in your company life cycle, your business plan should clearly explain your business goals, strategies and financial projections. It should also show that you have a solid understanding of the industry you are in and the competitive landscape.
A financial adviser can help you prepare a simple document which allows outside parties to see where you are heading and gives confidence that you are fully prepared.
Be careful not to make it overly simplistic or paint a romantic picture of how things may go. Recent years, with Covid, Brexit and the cost of living crisis, mean there is no excuse for not anticipating challenging periods and showing you have the plan to thrive.
2. Get your accounts and projections in order
Whoever you approach for a loan, lenders will want to see that your business is financially stable and that you have a good track record of managing your finances.
This means having up-to-date financial statements, such as your balance sheet and income statement. You should have clear projections for how you plan to use the loan proceeds.
You cannot plan for every eventuality but it is worth providing some analysis on best and worst case scenarios.
Each lender will have their own criteria but having your financial documents prepared and ready to review will save time throughout the process.
3. Consider the type of funding you need
The UK market has more varieties of lender than ever before with many different types of business loan available, each with its own terms and conditions.
You need to choose the type of loan that is right for your specific needs. For example, if you need a loan to purchase equipment, you might want to consider a term loan or a lease. If you need a loan to cover operating expenses, you might want to consider a line of credit.
Responsible lending from organisations like UKSE is where the lender acts in a customer’s best interests throughout the process, ensuring affordability, transparency of terms and conditions and support for the borrower if they face repayment difficulties.
Doing your research and knowing what you want will help, particularly if you have time pressures to receive the loan.
4. Know how you are going to use the funds
All lenders will want to know exactly how you plan to use the loan proceeds. They want to make sure that you are using the money for a legitimate purpose and can repay the loan.
Responsible lenders like UKSE not only ask whether a loan is in the interest of the lender but consider whether it is in the interest of the borrower, employees, local community and wider society. It is an approach that goes beyond simply providing ‘dumb money’.
We act as a critical friend, questioning the company leaders’ plans around their future use of the money rather than just checking they can make the repayment terms.
Based on a constructive conversation with all involved, we make a judgement call on the management team and their use of the money against that broader canvas.
With companies expected to take increasing responsibility on their impact on the planet, it is worth thinking about the environmental impact and how that would be measured. Bear in mind there are more opportunities to gain lower interest rates if there is a green sustainability angle to your plans.
5. Have contingency plans
No business is immune to unexpected events, as we have recent since the Covid-19 pandemic changed everyday life beyond recognition.
It is important to have contingency plans in place. This means having a plan for a decline in sales, a loss of a major customer, or another unexpected event.
Your lender does not want to catch you out but they have a responsibility to seek reassurance that you can change your activity to meet exterior conditions or when your own circumstances can change.
Here are some additional tips for companies preparing to borrow a business loan:
- Get a business credit report and review it for any errors.
- Build your credit score by paying your bills on time and keeping your debt low.
- Request a letter of recommendation from your bank or other financial institution.
- Meet with a business loan advisor to get personalised advice.
The track record of UKSE in supporting companies across the UK speaks for itself. Since 1975 UKSE has invested more than £110m, supporting 7,650 businesses, stimulating the creation of an estimated 81,000 new jobs.
As a social impact lender focussing upon job creation, sustainable growth and innovation we are ready to help firms get the support they need to build stronger futures.
Pictured from left to right: Steve Grice and Mike Lowe