How to present your start-up idea to a bank
Want the best chance of successfully securing a bank loan? Head of branches for RBS John Fagan has these tips to impress your business bank manager
The bank remains the first port of call for most businesses looking to raise seed capital – and with good reason. But for many business owners, we know the process of securing a loan is one fraught with worry and confusion.
Creating and then presenting financial forecasts and a strong business plan are tasks most would happily avoid. But with the right preparation, it is easy to improve your chances of successfully working with your bank to loan those vital funds.
Your business plan is the showcase document for your business idea and the most powerful text you possess at this stage. It is a great way to get started because it forces you to present your idea, the opportunity, your aims, and the strategy you will pursue to achieve your ambitions.
The reader must believe your business idea is financially viable. To do this you should include details such as:
- What your business model will look like
- Where you want your business to be in the long term
- Who your customers are and how you will target them
- Who your competitors are
- Your business objectives and how will you achieve them
- How much money you need and what will it be used for
Never start a business under-capitalised – you must know your options. You may need to cover the cost of set-up, equipment and materials before you can generate sufficient sales to make the business profitable.
Your plan must demonstrate what capital you need and how you plan to repay any borrowings. Include details of any security you can offer lenders (often business or personal assets) as well as sources of revenue and income and what the prospects are for investors or lenders. In addition to this, you’ll need cashflow, profit and loss, and sales forecasts for the next three or five years.
It’s worth speaking to a manager in your local bank branch for some advice before you complete and present your business plan for the first time.
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How to respond to the bank’s questions
Remember, it’s the bank’s objective to help businesses, while also getting their money back through repayments and interest. Understanding your cashflow in detail is essential. “When banks start to ask questions about where revenue comes from, they’re quick to realise if it’s built on sand,” points out Frank Lavery, area manager of Blue Orchid, which works with RBS and supports businesses in the north west.
Companies such as Blue Orchid are specifically designed to ensure business owners are prepared to the fullest extent, challenging business plans and helping business owners ensure the potential stumbling blocks, from the banks’ point of view, are removed.
Don’t over complicate matters – by simply talking to your bank they can gain a real understanding of your goals and discuss areas of your business plan. Banks are also a good source of free information and can provide guidance on all areas of your financial needs – from helping with your business plan to explaining the various funding solutions available.
The last impression you want to make is that your bank manager feels they’re being sold to, so we’d advise against a hard pitch. You will not be entering the Dragons’ Den, says Lavery, so treat it more like a discussion.
It is important not to be too defensive, and listen carefully to feedback. Be prepared to leave with a handful of concerns that you need to come back on. This isn’t a ‘No’; it’s more likely that your plan requires some further thought before the bank is willing to lend. The majority of the time, the individual you speak to will not have the power to sign off on the loan. They will have to pitch your business themselves, so a thorough understanding of it is crucial.
What do people do wrong?
Going in too early is one of the fundamental mistakes people make when hoping to secure capital from a bank. If you take in the first draft of your business plan, it is likely to start to crumble under questioning.
Check the basics:
- Are the costs in line?
- Are the profits going to pay back the loan?
- And perhaps most importantly – would I be willing to lend money on the basis of this business plan?
Despite the column inches devoted to the struggles small firms face when asking for loans, it is perhaps heartening to bear in mind that £6.8bn of new borrowing was approved in the first quarter of 2014, 10% more than the same quarter of last year, according to the British Bankers Association (BBA).
As the BBA says: “Almost two thirds of all applications for finance are approved – it’s clear that firms are a lot more likely to be successful than they think.”
Finally, don’t rush things – it is important to be confident and have great self-belief in your business idea. We all suffer knock-backs and doubts but if you follow the above steps, keep things simple and compile as much information as possible you are well on your way.
Don’t forget, working for yourself can be one of the most rewarding and exciting experiences and you are the driving force behind your idea. No matter how great a business plan is, investors buy into people. A solid, defensible business plan helps and should be used as your manual and point of reference when executing the strategy. But don’t be afraid to promote your own experience and ambition.
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.