How to get approved for a small business loan

Here, Peter Tuvey gives a few tips on how a small business owner can get that all-important ‘yes’ from a chosen lender.

Getting a loan requires you to know your business inside out

Getting a loan requires you to know your business inside out

So, you’ve decided to apply for a business loan. However, before jumping in and filling out that application, you need to ensure you’ve got the best possible chance of being approved for funding. Here are a few tips on how to get that all-important ‘yes’ from your chosen lender.

Know your business backwards

Whether you’re looking for an equity investment or an injection of debt finance, a lender will expect you to know everything about your business. After all, if you can’t speak confidently about your company, why would a lender feel confident about ploughing their money into it? It’s the equivalent of attempting to sell somebody a holiday without telling them where they’re going, or how they’re getting there.

Persuading someone to invest in your business over a period of time is harder than selling them something that they can use straightaway. With more money on the line and no guarantee of repayment, a lender needs to be sure that the risk to them is as close to negligible as possible.

Suffice to say, nothing will assure them more than a business owner who is comfortable discussing all aspects of their business, including past financial performance, future plans and the most pressing challenges that they face. If they can do this in an engaging manner, it should evoke a positive reaction from the lender, increasing the likelihood that they’ll approve an application for finance.

Before applying for a loan, think about the questions that a lender might ask you, and prepare comprehensive and honest answers to all of them.

Keep your records up to date

Business owners are notoriously busy people, with many having to work unsocial hours to stay on top of their to-do list.

However, a lender will expect to see a company’s latest financial records when assessing it for funding. This will include recent bank statements, statutory and management accounts, contracts and anything else that provides proof of revenue. If a business owner can’t present these promptly and in a decipherable format, it could threaten their chances of securing finance, or at least delay the deposit of funds.

Keeping your records up-to-date and readily available will save you from the mad rush of scrambling everything together at the last minute. To best way of staying on top of it is to set yourself some strict reporting deadlines – either weekly or monthly – and stick to them. If this sounds like too much work, or you simply don’t have the time, you’ll need to hire a professional accountant. The cost of the appointment will be more than covered should you go on to raise capital.

Have a plan and a purpose

At Fleximize, one of the most common purposes we hear for a business loan is to support cash flow. On the surface, this is a good enough reason to seek an injection of external finance, but it’s essential that you know why your current cashflow is short and cannot support the business. Is it because you’ve had to fork out for some extra stock to get you through a period of higher sales, or to pay overheads while you wait for a third party to settle an invoice?

Other uses for a business loan might include funding an additional office or retail premises, purchasing a piece of equipment that will help you fulfil a new contract, or covering the cost of a recruitment drive.

Not only will a lender want to know the reason you’ve applied for a business loan, but they will also want reassurances over your ability to repay it. As such, you will need to demonstrate how the loan – and what you’re spending it on – will support your business’s growth plans. In other words, will the loan deliver a revenue uplift that more than covers the cost of repayments?

Be open and honest about your financial history

There’s every chance that a lender will find inconsistencies in your financials – it’s what they’re trained to do. Even if you believe you’ve given an honest account of your financial history to date, be prepared for some tricky questions about any previous debts or cash flow issues. If you know your business well enough, you should be able to offer a reasonable explanation for these discrepancies.

By responding to all queries in a timely manner, and maintaining communication with a lender throughout the application process, it won’t look like you have anything to hide. Indeed, many alternative lenders will often lend to companies that have struggled with cashflow or debt repayment in the past. But if a business can’t show how they’ve successfully addressed these issues, they’re very unlikely to get approved for funding.

Ultimately, a disciplined approach to the application process is often a good indicator of your repayment ability, so it pays to make a good impression from the start.

Prepare to put up assets as security

Almost all lenders will ask for ‘security’ against their loans, which will protect them in the event of a borrower defaulting on their repayments. The size of the loan that you’ve applied for will determine what you need to provide as security. While higher-value secured business loans generally require a business to offer up company collateral such as property, unsecured business loans don’t tend to require any security, other than a personal guarantee from the owner – and possibly other company executives – that they will cover the cost of the loan if the business is unable to pay.

A personal guarantee simply demonstrates your commitment to a lender, giving them confidence in your ability to repay, even if your business enters into difficulties. Most lenders would tend to look sceptically on a business owner who is unable, or unwilling, to offer a personal guarantee on a loan.

Peter Tuvey is co-founder and managing partner of Fleximize.

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