By Bobby Lane, partner at Shelley Stock Hutter

It’s fair to say that the banks haven’t had much positive press of late. So now they are on the counter-attack, insisting that they are open for business and that the view of them as withholding funds from needy entrepreneurs is unfair. Are you feeling sympathetic? Probably not. However, the banks may have a point. Yes, they are being far more cautious about lending and in turn are rejecting loan applications. Yet start-ups and SMEs must also take responsibility and ensure that they are well prepared and realistic when approaching the banks for finance.

Useful link: – Looking for funding? Find the right finance for your business here

The Dos

Show commitment and belief in your business

No lender will finance a business if the owners do not have any of their own money at risk, whether a start-up or an established business. Banks in particular will want to see that the management team have sufficient investment of their own to ensure that they are not only incentivised but believe in the business enough to risk their own funds. Why would a bank invest their funds if the owners will not?

>Be prepared when raising finance

Although exaggerated for television, Dragons’ Den does give a good insight into how ill-prepared potential borrowers can be when asking for money. On numerous occasions the pitch will fall apart when the owners get to the financials. This is no different when approaching a bank, and an information pack is essential, whether it’s supplied in advance of or at the meeting itself. This pack must include:

• The last three years’ statutory accounts (if applicable)
• The latest management accounts
• A business plan clearly demonstrating the need for the finance
• Any other information that would help the bank make a decision.

The key in every case is the business plan, which should include at the very least analysis of the market, details of the business, the management team, marketing plan and most importantly a three year forecast of profit and loss, the balance sheet and a cashflow. This must clearly demonstrate where the funding is required, how it will be used and how it will be repaid.

Sell your ideas to convince the bank

Ultimately approaching a bank for finance is no different to any other sales process. The owners need to sell their ideas and convince a bank that the targets are both realistic and achievable. The bank will buy into the experience and skills of the management team as much as the business itself. It is therefore important that any skills gaps in the organisation structure are identified and filled by bringing in additional support.

The decision to lend will ultimately be made by a credit committee based on a report from a bank manager which will include the business plan. It is vitally important that the manager has confidence in the team, but the information provided must be enough to sell to the credit committee.

The Don’ts

Don’t be vague when asking for funding

Having sat in many meetings with bank managers, it is clear that one of the main downfalls of applications is when a business does not know how much or what they need. Going into a meeting and asking the bank how much they will lend may sound like a surprising way of going about things, but it happens regularly. When approaching the bank, a business must be clear about the scale and type of facilities required. Banks are currently trying to encourage less traditional forms of lending such as overdrafts with a move towards more asset-based lending. Therefore a business that can demonstrate an understanding of the best forms of finance to assist with their working capital requirements will also impress the bank.

Don’t be unrealistic

Banks will only lend to sound businesses that they have confidence in. Throughout the entire process the owners should be asking themselves if they were approached to lend to the company would they lend their own money. If the answer is no, then why would a bank? For businesses that are looking to grow there will be funding available if this can be demonstrated.

Don’t hide

The relationship with a bank is not just about financing for growth, but also for the ongoing finance for a business. Most customers of banks are happy to tell the bank when things are going well, but tend to bury their head in the sand when things are not going as planned. Banks do not like surprises, so it is vital that if things go wrong the owners do not hide. The bank may have a solution that could assist with any short-term issues.

Banks make their money through lending and now more than ever are being encouraged to do so. Businesses that approach the banks for finance can achieve their goals if they deliver a sound, well thought out proposition that is backed up by a strong management team. Without this, the credit committees will be able to say no and many more businesses may be left frustrated.