by Graham Jordan – 7th October 2014
Borrowing money is an accepted requirement of any business. Whether it is for starting up a business venture, buying a particular asset, expanding an operation or merely to assist day-to-day working capital issues, all businesses at some stage will likely need to borrow money.
In the main, most business will initially turn to their bank or an outside lending institution for assistance.
A general requirement of any lender is to understand the proposal being put in front of them and in particular, how the funds lent will ultimately be repaid.
Before you consider presenting a proposal for funding to any lender, consider the following:-
1. What is the financial history of your business operation?
If your business has been trading for more than a year, it is likely that a lender will want to understand how your business has performed financially in the past. Have your end of year accounting information available and use your Accountant/Finance Director/Business Consultant to point out the key elements of your businesses financial performance.
Your financial track record with your lender/bank (i.e. Overdrafts without agreement, Returned items on your account) can also influence how your proposal is received. If you are planning to borrow money at some stage, get off on the right footing by having managed your account well prior to any request.
2. What do you need the money for?
Sounds obvious, but you will be surprised how many people want a borrowing facility ‘just in case’. A ‘just in case’ facility, generally means a Working Capital arrangement (i.e. Overdraft). Understand why you need this (i.e. is it due to you having to buy items before being able to undertake the work or to fund the payment of Creditors before receiving monies owed to you etc?).
3. Over what time frame do you require it?
Understand the time frame in which you expect to have the borrowing repaid. Loan facilities are generally set over a specific period of time. Overdraft/ Working Capital arrangements are much more difficult to calculate. Lenders can become frustrated if you overpromise and under deliver. Preparing a Cash Flow will help you in being able to state and prove your understanding of the borrowing requirement.
4. What will be the impact to your business by borrowing the funds?
Be able to advise any lender what the benefits will be to the business in borrowing the funds (ie allow you to finance a contract that will bring £X’s of profit to the operation. Allow for the purchase of important equipment that will enhance future opportunities , to buy out a competitor – the list is endless).
Be able to show the benefit within the businesses financial projections. Profit and Loss, Balance Sheet and Cash Flow forecasts are really helpful here.
5. How do you intend to repay the borrowing?
It may well be that repayment will come from a continuance of the Businesses existing profits, or that the additional funding will enhance profit performance that in turn will be used to repay the funding.
Again Profit and Loss, Balance Sheet and Cash Flow projections will allow any lender to easily understand the impact that the funding will have on the operation.
6. Are you able or prepared to support the borrowing proposal?
Be prepared for the lender to request some form of security support in return for providing the funds. This may take the form of a Personal Guarantee (have you got the asset background to support this?), a formal charge over your private or commercial premises, maybe a charge over your debtor book or even a charge over the asset that you are purchasing or already hold.
Security support can very much depend on the value and purpose of the funding request.
Key things to consider: Be prepared to be challenged. Having the answers available can only give the lender confidence in your proposal. It shows that within the process you have also challenged yourself to ensure that your request makes sense for your business.
Please be advised that all views expressed in these posts are those of the author and not of James Rosa Associates ltd.