How to prepare your business for applying for credit

applying for credit, woman sorting out her finances, computer, working from homeIt’s true that women are less likely to take loans but this is changing, and we are seeing more and more amazing ladies growing their businesses and reaching out for funding.

Over the last year I’ve seen more start-up loan applications from women than ever before. We have some incredible businesses run by women who are looking for growth finance, and I feel this is a growing trend.

Women are generally more risk adverse, and fiercely independent so asking for help sometimes doesn’t come easily!

There is a theory that women would rather grow a business a little more organically and with a smaller, well managed, budget until the business feels like it has more momentum to grow with financial investment. That’s not a bad way to grow a business but if women are looking to grow their business using finance, our ‘three-legged stool’ approach means that you can put together a solid finance application in order to achieve the next step of your growth plans.

The idea behind the ‘three-legged stool’ approach is that to apply for a loan, you need a stable base, so there are three things to take into account, which are the ‘legs’ of the stool. A solid base means that all three legs need to be as equal as possible when submitting a finance application.

The first leg is affordability. Lenders need to see that the business has a strong history of generating income. This will give them reassurance that the business is likely to generate a similar income moving forward. Projections are a useful way to demonstrate growth but need to be backed up by a good financial record. A key metric used by lenders to determine affordability is the company’s earnings before interest, taxes, depreciation, and amortisation (commonly abbreviated to EBITDA). After deducting all current financial obligations and after taking into consideration the current finance cost, lenders need to be able to see a surplus. How much of a surplus varies from lender to lender and is often dependent on the other two factors: credit score and security which leads us to the next leg, the company’s credit score.

This demonstrates to lenders that the business behaves responsibly with credit by paying bills on time or not bouncing payments due to insufficient funds. Depending on the lender and/or the type of business, the company director’s personal credit score and the way they conduct business can also play a role.

Every time you submit an application your score goes down slightly so it’s worth noting that you shouldn’t make multiple applications at the same time as it’s likely to affect your personal credit score.

The third leg that lenders examine is security which provides them with a safety net. If the business cannot repay the finance, lenders need to be able to recover their funds. Security could include a charge on assets, personal guarantees from the director or the right to take over receivables of the firm. The level of security varies based on the perceived risk of the loans and it can contribute to shaping the interest of the loan.

And finally, the current economic and socio-political environment play a big role in finance applications. At the moment governments are having to intervene in markets, many private lenders are stepping back from offering finance and current credit conditions are stretched so it comes back to affordability; If your industry has not been particularly affected by coronavirus then you have more options available to you but if it has, it’s important to show lenders how your businesses is adapting, how it intends to recover and how it will make a profit.

The most important thing is to establish what you need the money for and understand the options available to you.  For example, if you’re investing in an asset, a five-year loan may be a good solution. If it’s for cashflow, then an overdraft, which can be arranged privately and externally to your bank, might be more appropriate. Always speak to your bank first, they understand your business and often have the most reasonable rates. If you’re eligible, they will be able to lend to you under the Coronavirus Business Interruption Loan Scheme (CBILS) or the Bounce Back Loan Scheme (BBLS).  Outside of your bank, there are also other  CBILS and BBLS lenders such as Funding Circle which has more flexible criteria, require less information and can process applications faster. Their interest rates are higher, however if you’re applying under the government schemes, the government will be covering the interest for the first 12 months after which you may be able to refinance at a better rate when stability has returned to the markets.

Conventional lenders, outside of the government schemes, are still lending but are more cautious and may request different types of security including personal guarantees. Their rates will be higher than bank finance but the application should move substantially faster.

So think what you need the money for, identify who is the most suitable lender for you and prepare your three-legged stool!

Sharon Cook About the author

Sharon Cook is Business Loan Advisor at long-established finance brokerage Choice Business Loans which helps businesses access traditional forms of finance, as well as alternative ways of raising finance such as peer-to-peer lending, crowdfunding and private lenders.

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