Having spent 31 years working for Lloyds Bank, I’ve seen my share of some pretty awful lending propositions, I can tell you - and in a lot of cases, it was down to the way they were presented.
Fortunately, I had the time and ability to work with my clients to re-mould most of them into something I was happy to support – so I thought it would be a good idea to share some of the common “strength gaps” that I saw and how they can be avoided.
All banks will want one and most business owners quake at the thought of doing one! My advice is to keep it short and simple but relevant. It’s a summary of what you’ve achieved so far and what you are planning to achieve in the future (next 1 – 5 years).
Summarise your business (and personal) strengths – highlight opportunities and threats – and plan for success. I would recommend you do this, even if it is for your own bank who should know you well. Think of it as an opportunity to show them how good you are!
Be as specific as you can, with as much background and rationale as possible. This will show the bank that you have fully thought through the reasons behind the request, what the money will actually be used for, and what you are looking to achieve as a result of it. Avoid loose terms like “cash flow” unless you can substantiate it with a cashflow forecast/ budget.
If possible, include some form of cost-benefit analysis and alternatives you’ve looked at. Again, this will demonstrate that you have explored various options in reaching your decision and request. Make it as well balanced as possible, and if there are any downsides, make sure you recognise them and show how to minimise or remove them.
The number of times people ask for less than they really need is incredible – because they fear a ‘decline’ if they ask for any more.
But beware, if you will still need the larger amount (from somewhere) and you haven’t put the right finance in place at the outset, you are merely deferring the inevitable and causing problems down the line. The bank will look much less favourably at a second request a month later, than they would have done to a well thought out and planned request at the outset.
Include all costs and expenses related to the proposition even if you are able to cover these yourself, it will show the bank (1) you’ve anticipated as much as possible – avoiding OSINTOT syndrome (oh sugar, I never thought of that”) and (2) it shows you are putting a larger stake into the whole proposition – which the bank will like.
If you are asking for more than you need, be prepared to justify it. They will be impressed if you’ve done your homework and built in a contingency “what if” flexing into the proposition.
This is the area that the bank will look at most closely – as affordability and strong repayment capability are at the crux of any lending request – or should be! So how much will a loan will cost you over 2, 3, 5 or 10 years? As a rule of thumb, taking 10% as an interest rate and a loan of £10,000, the repayments will be £461 (2 years), £323 (3 years), £212 (5 years) and £132 (10 years) per month.
My advice generally is to ask for a loan period where the repayments are comfortably affordable, and will not put any pressure on the business. It’s a nice thought to want to pay back in two years, but far better to seek repayment over three to five years, and have the choice of paying it back early if circumstances allow.
To prove a strong repayment capability, you will need to show (i) historical profitability and (ii) future profit forecasts. Show what assumptions you have made, and how they have been tested. For serviceability the banks generally work on ‘EBITDA’ (Earnings Before Interest, Tax, Depreciation & Amortisation).
Basically, take your net profit before tax/retained profit and add back depreciation, interest, loss/profit from sale of fixed assets. Deduct existing finance/loan interest, tax, drawings and this should leave you the amount available to meet the proposed loan commitment.
The bank will look at the ratio of ‘funds available’, against the loan repayments per annum. The higher this is, the greater the repayment capability and margin of comfort.
If you can – base your figures on up to date management accounts, so they are as current as possible and include a profit budget to show sustainability.
Be prepared for the bank to ask for security and have details of what you could offer if necessary, for example personal guarantees, a second mortgage, shares or other investments. Don’t be put off by a lack of security if you have none to offer, as there are schemes available to overcome this issue – provided that the proposition is viable in all other aspects.
The bank will also want to see your own personal financial profile and will be impressed if you can give them one before they ask. A simple summary of your personal assets, liabilities, income and expenditure will suffice.
Don’t forget - I am here to help! so give me a call if you need any advice on how to put something together.
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