It may seem hard to believe, but bank lending to businesses is set to rise next year.
This is according to a new report from the Ernst and Young Item Club, which suggests that lending will increase from 2014 despite currently being 25 per cent down on 2008. The group reports that lending will beat its 2008 peaks by 2016.
Although business owners have spent much of the past five years exploring potential non-bank finance routes, a predicted upturn in conventional funding could be a welcome change for those firms that have been excluded since the recession. So in preparation, how can you make your business as attractive as possible to a potential lender?
1. Perfect your plan
Your business plan is perhaps the key element of your loan application. A potential lender will want to see a clearly thought out plan for repayment and growth, backed up by reasonable financial forecasts. Indeed, your financial predictions are vital. You will likely be required to provide at least cashflow, profit and loss, and balance sheet forecasts, the conclusions of which are properly reflected in your business strategy. Lenders will also want to see comprehensive contingency planning. What potential risks have you identified, and how will you mitigate them? Are there factors that could negatively impact your cashflow? How will you tackle these issues?
2. Be realistic
There is a temptation to ask for the bare minimum, working on the assumption that a bank will be more likely to approve a smaller loan application. In reality, though, this may not be the right way to approach the problem.
Realism is likely to be seen as a key advantage when lenders investigate your business plan. They will want to see that you have a clear plan for repayment and expansion, and that you will allocate the resources necessary to allow you to achieve your goals. As such, you should be honest about the amount you need to borrow. A lender may be more likely to approve a larger application that shows a clear strategy for repayment than a smaller application with a higher risk of default.
3. Build your history…
In the case of existing businesses, potential lenders will pay close attention to previous payment histories. A pattern of late payment will make it significantly more difficult for you to obtain credit. Similarly, a large amount of existing debt may mean that you are a less attractive proposition to lenders. You may be able to mitigate the latter problem by presenting a plan outlining how you intend to pay down your existing debt and at what rate. You should remember, though, that some lenders may be less willing to extend credit on the basis that it will be used to cover existing debts.
The key thing to remember, however, is that you should make payments promptly at all times, and particularly in advance of a loan application.
4. …and remember your personal credit report
Lenders may seek additional information on new businesses, or those without an existing credit history. You should be prepared for a bank to run through the personal credit histories of the directors of your business, and you should note that the state of your report is likely to have a direct impact on the outcome of your application.
5. Do your research
Finally, research remains one of the key ways in which you can ensure you are applying to the right people. Remember that there is no necessity for you to make an application to the bank with which you hold a current account. Instead, ‘shop around’ in advance of your application to determine which lender is offering the best terms. By finding the loan with the best terms you will maximise your chances of being able to pay it back - and this, when reflected in your business plan, will in turn boost the chances of your application being successful.
**Are you looking for funding for your small business? Read our small
business finance guide to help you raise the cash you need.