How to... get a bank loan
Tuesday 13 October 2009
What's the best way to approach your bank manager for money? "The classic joke is on all fours, of course," says Steve Everhard, of the entrepreneurial advice team at the business consultants Grant Thornton.
A more serious answer is the boy scout's motto – be prepared. Know what you want; understand what the bank might be willing to offer and on what terms; and understand your actual or potential business from top to bottom and from inside to out.
"The issue, at the moment, is being very sure of your own cash position," continues Everhard. "If you don't do your homework, there's no point in going to the bank. Go to the bank with a plan.
"Times are hard, and getting money out of your bank is hard. The bank is going to want to be very sure that you are doing all the right things to protect the business and to protect the bank's exposure. You always have to look at it from the bank's perspective."
Honesty is one of the best principles with a bank, believes Everhard, especially where the business is already trading. "You have to be open about why you need the loan in the first place," he says. "What is happening in the business? Was this expected? What the banks are looking for at the moment is openness. But lots of businesses don't feel they can be open at the moment."
Businesses that are already trading should in any case consider carefully whether they really need to raise some extra cash. Banks will not want to lend to a company if the money it needs is locked up in the business because of poor cash flow and credit management. "Make sure that your own cash management is good first, and then go to the bank," advises Everhard.
The most important thing is preparation, stresses Stephen Alambritis of the Federation of Small Businesses. "Good information, top knowledge, up to date," he says. "If it's an existing business – how it's doing. If it's brand new, what it's going to do.
"The other thing is to show your personal commitment, with personal guarantees, your time, putting your house on the line."
It is important, stresses Alambritis, to support yourself with an excellent professional. "Arm yourself with a good accountant you have known for a long time," he suggests. "If you belong to a trade association with a warranty, put that into the pot. And be focused."
It is also important to think about how to impress the bank manager on a personal level. "If a meeting is arranged, don't cancel at all costs," says Alambritis.
Bank managers have their own preconceptions and prejudices. Alambritis suggests potential borrowers ask around to find out which managers are most sympathetic or hostile to particular sectors. If one manager has a reputation for being sceptical about the prospects for care homes, it makes sense to arrange a meeting with a different manager at a different branch when seeking funds for a care home proposal.
Even within the same banking group, individual bank managers have various approaches, which can be the difference between being funded or rejected, explains Alambritis.
It is also important before a meeting to look at the British Bankers' Association website to see banks' charging structures for loans and overdrafts. Knowledge of standard terms helps the potential borrower to negotiate lower charges and will also impress the manager that this is a person who prepares. "Challenge what you are being offered in a friendly way, but firmly," advises Alambritis.
Rosana Mirkovic, an SME policy adviser at the Association of Chartered Certified Accountants, is another who stresses the need to be on top of your business brief. "It's good to have enthusiasm and passion for your business, but you also need to back it up with evidence," she says. "Perhaps testimonials from customers, or show your past experience from your previous work.
"You have to have very, very good cash flow forecasts, especially now. Run these past someone – we would say an accountant, of course. Get them checked. Make sure you can answer tricky questions about falling demand, or what will happen if your orders decrease by 15 per cent. Plan ahead for that worst-case scenario."
The point is emphasised by Everhard. "Before you go to the bank, do everything you can," he says. However, even that is not a panacea, he acknowledges. "You still might not get any money, but you do stand the best chance."
GOVERNMENT ENTERPRISE FINANCE GUARANTEE (EFG) SCHEME
SMEs which have difficulty in obtaining funding from banks should consider seeking support under the EFG, suggests Rosana Mirkovic. This provides government guarantees for up to 75 per cent of loans of £1,000 to £1m, for up to 10 years. Borrowers must pay a guarantee premium of 1.5 per cent in the first year and 2 per cent in subsequent years.
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