9 things banks want before they’ll lend
What do banks look for in growth firms? Head of RBS branch business John Fagan reveals the stand-out features of sustainable growth companies
All banks – and RBS is no exception – recognise the vital role that debt finance plays in supporting the growth plans of businesses like yours, but it’s also hugely important that we focus our lending on companies that are viable both in terms of current operations and their expansion plans.
But what does that mean in practice, or to be more precise, what are lenders really looking for when they consider your application for finance. Here are some of the key factors that we take into consideration.
1. Sensible numbers?
Many businesses grow organically over time and have little need for additional cash. However, there will be times when investment is required – perhaps to open a new shop, or ramp up production to service an important new client.
Additional investment will require a business plan outlining the cost and projected returns as well as an assessment of the market.
The business plan doesn’t have to be perfect in every detail but we do expect to see realistic projections for sales, revenues, ideally sense tested through best and worst case scenarios and with market research or similar evidence to back the assumptions. It’s also important to have an idea of how much finance is required and why.
2. Strong revenues and margins
One of the key indicators of a company’s growth potential is its existing track record in terms of attracting and retaining customers and generating revenues over a prolonged timeframe.
A company that has enjoyed consistent sales while also winning repeat business (a sign of customer loyalty) will be attractive to a lender. It’s also important that the company is operating on competitive but viable margins for its industry.
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3. Multiple revenue models
All businesses are subject to fluctuations in demand and this can play havoc with revenue projections.
Businesses can hedge against peaks and troughs by diversifying or offering complementary products and services. For instance, a manufacturer can enhance income by both selling machines and selling service contracts.
4. Running lean
When it comes to payroll, all businesses perform a balancing act. To retain customers and win new orders, it’s vital to have enough people on board to provide a competitive level of service.
Equally though, a well-managed business won’t be over-staffed. A lean but effective business is a sign of good management.
5. Effective cash management
Effective cash management is vital. This can be a particular issue when the company invoices clients rather than taking cash or credit card payments.
Well-run companies ensure that invoices are issued promptly and that debts are paid on time. They also tend to avoid over-trading where the gap between the upfront costs of selling a product and the eventual payment by the customer can create a sometimes fatal hole in cashflow.
6. Forward looking investment
Lenders also look closely at whether the company’s finances have been managed sustainably.
For instance, in the case of a company that operates in a competitive and fast moving market we would be keen to see that sufficient funds are set aside for future product development.
7. The ability to self-fund
Businesses shouldn’t necessarily expect a bank to provide all – or even the greater part – of the finance required to support a growth plan.
A business that has been trading profitably should be prepared to allocate its own resources. Again its ability to do that will, to some extent, depend on whether it has set aside cash for investment.
8. Rapid cash generation
Some growth proposals are speculative – for example, a plan to launch an unproven product into a new market. A lender is more likely to look favourably on growth plans that promise to generate revenues quickly.
For instance, a new shop or café will require investment in stock and fittings but should generate revenues from day one after opening. From a lender’s point of view, that’s very attractive.
9. Rounded management skills
If a company’s growth plan represents a step change in its operations – say opening new production facilities, taking on significant numbers of staff or setting up an overseas distribution network – it’s important to have the right mix of skills on board.
Thus, a business that is strong on technology, sales and marketing, might also have to think in terms of project management and financial planning. Skills gaps can be addressed through recruitment, partnerships and joint ventures (JVs), taking on advisers, or adding non-executive directors.
Banks are keen to lend to viable, well-run companies and while each business (and growth opportunity) is different, a company that generates sustainable revenue and profits while keeping a tight control on finances will always be attractive to lenders.
John Fagan is the head of RBS branch business, England & Wales and direct banking. His team work with businesses to build a bigger support network inside the bank and beyond with partners and fellow customers.