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5 things you should know before applying for a business loan

By Nick Brown, partner and head of charity audits at accountants Plummer Parsons.

There are many assumptions that business owners make when applying for a business loan. Many think that since the banking collapse, successfully securing a loan with a bank is about as likely as winning the lottery. Of course it's not, but it would be a lie to say that the banks weren't more scrupulous when it comes to lending money to small start-ups and entrepreneurs these days.

The old adage that you never know unless you try holds true here. Whether you need the cash injection for rapid expansion, new product development, manufacturing equipment or a big marketing campaign, securing a bank loan could be exactly what your business needs to propel it towards a more profitable future.

I've broken down the five essential considerations you need to be aware of when applying for a business loan from a bank. Banks will be looking at each of these factors very closely so it's essential that you are as well prepared as you can be.

Strong profit and loss accounts

Your cash flow will ultimately form the backbone of any application you make for a business loan. The bank will want to see what you company turns over and what it makes in profit over a period of years. This is so it can assess the success, not just of your business as it stands today, but as you've grown it over the years. You should therefore see your profit and loss accounts are effectively a health check of your business make sure they are as accurate and professional as possible. The lender will be looking primarily for signs of reliability from them, so it can ascertain your ability to make repayments. As well as P&L accounts, it's likely the bank will also want to see projections for future profit /loss.

Capital already invested in your business

The bank will look at how much capital is tied up in your business compared with how much you want to borrow. They will also look at how much of this capital is your own personal investment in the business. The more money you have already invested or have committed to invest in the business, the more dedicated to the success of the business the bank will regard you. This will seriously help strengthen your application.

A good credit history

Your bank will scrutinise not just your credit history but also your own personal credit history. A credit history will tell the bank how you and your business have handled loans and credit obligations in the past. It will also tell the bank of any existing lines of credit you or your business has. If you're approaching a bank that you have already established a positive deposit/credit relationship with, this can really help to put minds at ease when it comes to assessing your risk.

A bulletproof business plan

Any lender will want to know exactly how you plan on investing the money it's going to lend you, so it's crucial to have a structured and bulletproof business plan. Any business worth its salt will already have a solid financial plan in place, which it will have developed with the help of an accountant. This should then form the basis of a wider business plan that you can present to the bank. As well as how you plan to grow your business, they will want to understand your business's unique selling point, marketing strategy and how it fits within your industry sector.

Industry insight and a compelling CV

Although it is your business that the bank is being lent the money, your bank is ultimately going to be dealing with you. As such, you need to reflect the executive competence and responsible strategic decision making that takes place at the highest level of the business. Understanding your business, your industry and being able to articulate this expertise and insight in person, as well as through your own resume, is crucial. You may be perfectly capable of running your business today but securing a loan could lead to a lot more responsibility and a growing turnover. The bank is going to want to be convinced that you are up to the job.

Securing a business loan is rarely a solo effort so you should always work closely with your accountant and all the important budget holders in your business before approaching the bank. Perhaps then the best piece of single advice I can give anyone looking to secure a loan is one that every Scout should know: Be prepared.

Nick Brown is a partner and head of charity audits at Brighton accountants Plummer Parsons. He has been a chartered accountant since 1983 and, as well as being a member of the Information Technology Faculty of the Institute of Chartered Accountants, he is also an expert on the charity and not-for-profit sector, holding a diploma in Charity Accounting.

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