Irish SMEs now have more choice than ever before when it comes to business loans. The digital age has brought with it a wave of new specialist providers who are bringing easy applications, quick decisions and more competition to the market.
In fact, a recent Central Bank Lending Survey finds that SME lending is the only market segment where credit standards are not expected to tighten this quarter.
That all said, it's still important for Irish business owners to know what lenders are looking for when assessing a credit application.
We asked resident expert, Philip Casey, for some top tips to help business owners look their best when applying for a loan...
"Financial providers are in the business of lending so they want to say 'yes'. Help them to understand how a loan will help your business and how you will have no trouble in making repayments on time and in full."
Head of Credit
1. Be Open & Honest
First impressions count. Be upfront and honest. Let's face it, in today's data-driven digital age if you've had credit issues in the past, a lender will find them. There are very few business owners or successful entrepreneurs out there who haven't faced challenges at some point. It's not an automatic deal breaker. What is important is how you dealt with them. If you've experienced financial difficulties or previous liquidations in the past then address them early in the application process.
- Present your version first - Don't let a lender find out about a previous judgement or insolvency via some third-party credit check. Be upfront and present your side of the story.
- Explain previous difficulties - Building a successful business is very rarely plain sailing. Most business owners and entrepreneurs have some history. Explain issues upfront and focus on the actions you took to resolve them. How did you try to honour your commitments? How did you ensure that you paid as many suppliers as possible?
- Don't hide personal debt issues - Everything might be OK on the business side but lenders will typically look at the individual history of each director. If there are personal debt issues there, they will show up. Again, address these early on and explain why they won't impact on the business.
2. Timing is of the Essence
At Linked Finance, the only documents we typically require are the most recent set of filed accounts and the last six bank statements. Your financial accounts give us a sense of the stability of the business while your bank accounts tell us about the affordability of your proposed loan.
Now, timing is important when it comes to bank statements. You might be showing strong growth in your financial accounts, healthy EBITDA and a positive balance sheet but if your bank statements don't demonstrate affordability that could be a problem.
Whatever your business, there may be times when cash is tight. That may very well be why you are looking for a loan but don't wait until you're bouncing payments or at your overdraft limit before arranging a working capital facility.
According to Phil, here are some key pointers about how you can present strong bank statements:
- Plan Ahead - Try to predict when cash flows may be low and plan ahead.
- Don't Leave It Too Late - Avoid applying for a loan when cash has already run out.
- Apply When You're Riding High - If your business is in any way seasonal, try to arrange any facilities that you might require during the low-season while your high-season is in full swing.
3. Stay in the Good Books
- Improving Profitability - Have you been posting profits or at least moving toward profitability?
- Increasing Revenue - Has revenue been increasing over the last couple of years?
- Positive Net Worth - Does the balance sheet show more assets than liabilities?
- Other Debt - Is your business overly leveraged with other debt?
4. Don't Wave Any Red Flags!
There are some issues that lenders will come across that will immediately give them pause. It may seem like common sense, but don't give a lender any clear reason to reject your loan.
Here are some of the most common red flags that Phil recommends to avoid:
- Not being up to date with revenue payments
- Unsettled financial judgements against you or your business
- Missed direct debits
- Bounced cheques
- Going over your overdraft or agreed limit
- Personal mortgage payments and/or personal expenses transacting via your business account
5. Tell a Story...
Linked Finance doesn't require long-winded business plans or complicated cashflow projections. The only documents we require are your bank statements and financial accounts.
That said, it's still important to know what the funds are for and how they will have a positive impact on your business. The ultimate purpose of the loan should be to help your business to grow and become more profitable.
Tell a story that demonstrates the following:
- Sound Purpose - Show a lender how you know your market and how this facility will help you to perform better. What is the opportunity and how will these funds help you to take advantage. Feel free to use your own examples, such as where a previous business expansion or equipment purchase has led to profit before.
- Good Track Record - Have you fulfilled past loan commitments for refurbishment, or the purchase of new machinery, and paid off these loans with revenue growth? Does your business requirement match the expected life of the asset?
- Anticipated Growth - Demonstrate a firm understanding of the impact these funds will have on your bottom line. Show how the proposed loan will help improve profitability and enhance your ability to repay.
If you enjoyed this article and you are planning a business improvement loan then please contact us at Linked Finance and we will help provide you with a fast and affordable business loan.