No 3. Credit Checklist
If you are looking for the right finance for your business and your particular objectives, it is important to be prepared and to think like a funder. Knowing what a lender is going to be looking for and the sort of questions that will be asked will not only help the process go as smoothly as possible but will also enable you to prepare ahead of time and present your business case well.
As a starting point, let’s examine what a lender is going to be looking for in your business. Every lender has their own criteria in terms of what they see as the ideal business to which they will lend. How they analyse a business has some common traits which we will look at below.
To think like a funder, let’s run through the five C’s of Credit – Character, Capacity, Capital Collateral and Conditions
For ‘character’ they mean credit history. This is your track record of repaying debts which can be obtained from a credit report. This is provided by one of the credit agencies, much in the same way as personal lending, such as car finance and mortgages. In the case of your business, it will examine what the company has borrowed in the past and whether repayments happened in line with the schedule agreed. It will likely go back many years and will enable the potential lender to score your creditworthiness. Lenders will have a minimum score that has to be achieved to be eligible and this will vary between funders according to their own criteria.
This looks at your business’ ability to repay the loan. It will achieve this by establishing your Debt To Income (DTI) ratio. This is a comparison of income against recurring debts. In essence the lower this DTI can be, the better. Again, each lender is going to have their own criteria in terms of the ideal DTI they are looking for.
Capital refers to the amount of money you can put towards what you need to do with your business. If, for example, you are looking at purchasing a new piece of machinery or refitting an office or shop, the lender will have their own view, their own criteria, on what they would usually be expecting a business to find themselves.
In order for lenders to manage the risk of providing money to businesses, they may ask for collateral. These may be business and / or personal assets that the lender can possess, agreed within the contract, if there is a repayment default. Each lender will have their own approach on collateral depending on the nature of the funding facility and their appetite for risk.
This refers to what the business intends to do with the funds. Generally speaking, the more specific the purpose, the more detailed the plan and the more certain the outcome from the plan, the less risky the lend will be perceived. Therefore, it pays to prepare a detailed case and have facts, figures and analysis at your fingertips.
Preparing your facts, figures and analysis
There is an old motto in the Scouts that says, ‘Be prepared’. This is especially true in preparing to apply for business funding. The more detailed your requirement, the more comprehensive your supporting evidence, the more likely you are to get the level of finance you require.
It has been said that obtaining business funding is getting more automated, with lenders using algorithms to work out whether they will lend money to a business. This may be so with smaller loans and smaller businesses, but it is not the case with more sophisticated requests. Then it is a person-to-person negotiation. At Newable we help our clients prepare fully for this and place great emphasis on getting to know you, your business and your people, in order to get the best possible funding outcome.
So, what are you going to need? It will vary a little, but this is a good overview:
The detail of how you are going to use the money
Equally importantly, you will need to demonstrate how you are going to make money from the money lent to you. Prepare projections of how it will create positive change and increase revenue and profits. Draw on as much evidence as you can, such as market research and analysis, as well as case studies of previous loans and what you were able to achieve from them.
Gather your bank statements
Go back at least a couple of years and use them to tell a positive story about your business performance
Profit and Loss statements (P&L)
Again go back at least a couple of years and gather those that have been prepared over time. Your objective is the same as mentioned above – to tell that positive story.
These document your liabilities, assets and capital. It’s about demonstrating that you have a healthy business with a strong cashflow.
Lenders may want to look at you and your fellow Directors’ personal assets and liabilities. This may be in relation to requiring collateral, but it is also to understand more about you – the people driving the business forward
Be open, be yourself
Remember that, above anything else, it is important to be open and honest in terms of the facts, figures and analysis you present. Lenders have seen more plans than most of us have had hot dinners and they know when something does not add up.
So, if you are, for example, a little worried about a blip in your figures, prepare your analysis as to what happened and why. But, most importantly, demonstrate how you got things back on track. Never forget one of the biggest perceived risks is you and how you behave in business. If you are a safe pair of hands, it will count for a great deal.
In our next article we will be looking at what types of finance are available for different purposes and different types of businesses. There is now more choice than ever so it’s worthwhile to get to know what you may need at different times, enabling you to grow your business faster and with greater certainty.
Find out more about how Newable Finance can help you apply for business finance.