How to apply for a bank loan for your start-up or small business
The lending process can seem prohibitive, but here is a step-by-step guide to getting through it
Let's face it, no-one likes dealing with rejection. And, when it comes to getting a bank loan, the chances of being knocked back can seem prohibitively high. Having had their fingers scorched by the credit crunch, Britain's banks remain reluctant to lend to small firms – not even the pressure of Project Merlin has persuaded them to loosen the purse strings.
However, this doesn't mean the banks' doors are closed – if you can present a clear, compelling case, backed up by hard facts, you stand a great chance of getting the money you want. This step-by-step guide should help you do so.
Know what you want
You need to know exactly what you want before you start pitching for a bank loan – if you aren't clear in your own mind what you want, you may end up taking on a loan which is totally unsuitable- and places an unsustainable burden on your company.
First, consider all your costs and work out exactly how much money you need. Don't be too conservative here – if your initial loan is too small, you may end up having to go back for more loans in future, and that can get expensive.
Then, work out the type of loan you need. You might be after a working capital loan to cover a short-term cashflow problem; a fixed asset loan to purchase facilities or equipment; or a hire purchase loan to secure the long-term purchase of an expensive asset. The more closely the loan matches your circumstances, the better.
Finally, you need to think about terms. How many years will you need to repay the loan? Do you want a fixed rate of interest, or a variable rate which moves up and down with the Bank of England base rate? The terms should fit your business strategy, and ensure you can continue to meet your repayments even if the company hits turbulence.
You may have held a personal account with the same bank for years, but that doesn't mean you have to take out a business account with them.
Make sure you shop around for the bank which offers the most favourable terms – and gives you the best chance of success. A quick search of the internet should give you a rundown of what's on offer –the British Bankers' Association offers some excellent advice on the loans currently offered by Britain's banks, and you should also check out specialist websites such as Loanfinder.
Run a credit check
Before you arrange a meeting with the bankers, take the time to run a credit check. If you can show the bank a strong credit score, those assessing your application are more likely to view you favourably.
Brand-new businesses may find it difficult to get a credit rating; if this applies to you, you should get a personal rating to show that you, as an individual, are good for a bank loan.
Do your homework
Before you pitch, do some background research on your market and the opportunities it presents. If you can show the bank that your business has money making potential, they'll be impressed no matter what the company does.
When carrying out your research, think about the following questions:
- Is your market growing, and if so, by how much?
- Where is growth likely to come from in the future?
- What sort of market share can your company expect to achieve?
- Who are your competitors, and how are you going to take them on?
- What sort of industry trends will enable your company to expand?
Create a tight business plan
The business plan is key to your loan application; those overseeing the application will want to see a plan which is tight, thorough and realistic.
Your plan needs to make provision for failure as well as success, delivering detailed projections, and responses, for all eventualities. It's likely that the bank will also want to see you've taken out insurance to deal with the possibility of loss and failure.
Show the bank you're in it for the long haul by including a detailed overview of your future strategy, and explaining how you will expand the business to meet these objectives. You can talk about diversification, product pipelines and international expansion – but make sure you can back up any forecasts or ideas expressed in the pitch.
All this information must be condensed into a document which is easy to read and free of jargon. Your business plan doesn't necessarily have to be wrapped up in a fancy, colourful design, but you have to make sure the font is large enough to read, the spacing is clear and regular, the paragraphs are evenly spaced and the reader is guided by a contents page. If you make the reader work to find the information they need, they're likely to form a negative view of your business straight away.
Before you sign off the business plan, make sure you get a professional accountant to go through it with a fine tooth comb – the bank will look at your projections much more favourably if they've been checked by a professional.
Hit the perfect pitch
Even the best business plan will mean nothing if you can't pitch properly. When judging your loan application, the bank is judging you as well as your business – so if you can't sell yourself, you've got no chance.
The presentation begins before you even walk in the door; if the bank offers you a meeting, you need to make sure you're on time, in smart attire. Never cancel a bank appointment unless it's absolutely necessary.
When it comes to the presentation's content, the more detail you can give the better. You need to clearly specify the amount you're after, and the timeframe you need, and provide a blow-by-blow account of how the money will be spent – right down to the last penny.
Make sure you rehearse the presentation before the meeting, to ensure you get the length and timing spot-on. Also, jot down answers to the questions you think the bank may ask, and compile a folder with relevant documentation, such as accounts, wage slips, invoices and tax returns.
Challenge the bank
If the bank is sufficiently impressed with your pitch to offer you a loan, don't accept automatically – challenging the terms can actually help your case as long as you lay out your challenge in a constructive, knowledgeable way.
If you think the bank is offering you unfavourable terms, you can make reference to the packages being offered by its rivals. And, if the bank criticises an aspect of your business plan, don't be afraid to contest their criticism.
By challenging the bank constructively, and backing up your challenge with facts and figures, you may be able to secure a more favourable package. The bank may also be impressed with your knowledge, and view your application more favourably.