I often write about how different business finance products work, looking at details like what kinds of companies can get them, and the things you need to know about the criteria to have the best chance of being accepted.
But there are also some common pitfalls that can catch applicants out which are just as important. Let’s look at what not to do when you’re applying for a business loan.
Don’t ask for more than you can afford
The first common mistake that business owners make is asking to borrow more than they can afford. The thought process is understandable — “I’ll see how much I can get” — but this approach might do more harm than good.
Lenders compare the amount requested to your turnover and profit. Many will have a rule-of-thumb ratio that they won’t go over, for example 10–20% of annual turnover, which means you can only borrow a reasonable percentage of what you’re currently making. If you’ve asked for £200,000 and you’re turning over a million, that’s one thing — but the same loan request with a turnover of £50,000 is likely to lead to a ‘no’.
Related to this is profitability. Even if your turnover is high, low profits or losses change the overall picture — and if you’re in the red, it’s harder to see where repayments will come from.
Hide past issues
Having credit trouble in the past might be something you’re reluctant to discuss, which is understandable. But one of the worst things you can do when speaking to a lender is hide past issues like late payments, CCJs, winding orders or other signs of distress.
The thing is, if your application progresses, these issues will be picked up in the lender’s due diligence process anyway — so you might just be delaying the inevitable ‘no’.
On the other hand, if you’re honest and up-front about difficulty in the past, you might be surprised by how understanding some lenders can be. For example, if you’ve recovered from a rocky period and are now making good profit and want to grow, you could still be eligible for a loan — in this case, concealing negative aspects of your application might actually turn a ‘yes’ into a ‘no’.
Don’t expect to fund an idea
The overwhelming majority of business lenders want to work with firms who are already trading and showing profits. If you’re aiming to fund a business idea or new venture, that’s admirable — but a business loan may not be the right way to do it.
If your business is a start-up or hasn’t started trading yet, it’s very unlikely you’ll get a standard business loan for it, simply because most loans are based on turnover and profit. There are options out there though, such as start-up loans, government grants, or equity crowdfunding.
Have a vague plan
One of the first questions lenders will ask you is “what are you going to use the money for?” If you don’t know how to answer that question, it’s not a positive signal, because it shows a lack of direction.
On the other hand, if you’ve got a business plan and financial forecasts that show how you’ll put the loan to good use, it demonstrates that you’ve got a real plan. Like many things, it’s a question of judgement — and for most lenders, back-of-a-napkin calculations won’t cut it.
Don’t have any of the paperwork ready
Related to the point above, having paperwork ready shows that you’re serious about getting a loan, and prepared to progress your application. Almost everyone will want to see recent bank statements and standard financials like profit and loss. If you’ve got filed accounts with Companies House, that’s advantageous too. Like having a clear business plan, having all the paperwork ready shows that you’re running a tight ship, and you know exactly what’s coming in and going out.
These are some of the issues that can get in the way of the business loan application process. But it’s not all doom and gloom — if your expectations are realistic, you’ve got a clear plan, and your business can demonstrate profitability, you’ll be in a good position to get a business loan.
If you’re not sure whether your application will be realistic or not, there are many companies such as Funding Options that can help you find the right lender for your situation and give your application the best chance of success. Avoid these common mistakes, and you’re already halfway there.
Conrad Ford is chief executive of Funding Options, recently described by the Telegraph as “the matchmaking website for small businesses and lenders”. Funding Options has been selected by HM Treasury to help businesses find finance when they’re unsuccessful with the major banks, as part of the Bank Referral Scheme that launched in November 2016. @FundingOptions