As SMEs slowly emerge from lockdown many are struggling to find the necessary funds to restart and recharge their businesses.
Prior to the pandemic, getting access to traditional bank loans was already difficult and then COVID-19 hit and accessing credit became even harder. Government support has helped some businesses survive or recover, but those programs will soon come to an end.
For businesses that are looking beyond recovery to continued operations and growth, now is an excellent time for capital purchases, diversification or taking advantage of viable opportunities. However, mainstream lenders are still cautious and avoiding extra risk. Alternative lenders’ criteria have also tightened.
What do you need to know in order to set yourselves up for loan application success?
Two of the Five Cs of credit
You likely know the five Cs of credit:
- Capital
- Character
- Capacity
- Collateral
- Conditions.
They’re all still important, but two are receiving more scrutiny or potentially having more impact now than they were pre-COVID.
Cashflow forecast is king
Don’t be intimidated to talk cashflow with a lender. It’s a common issue. Lenders know you need cashflow support or else you wouldn’t be applying for a loan. The thing to understand is that a business is more than just money-in, money-out. It’s all about what you plan to do with the money.
Lenders want to see that you’ve taken the time to work out where your business will be in 12 months’ time. This is called a cashflow forecast, and it’s meant to demonstrate to the lender that:
- you know your business;
- you have a plan with a specific outcome in mind; and
- you have considered worst- and best-case scenarios.
A simple spreadsheet will do. Remember: it’s not just, “How will I spend this loan money?” but, “How will this loan make a difference to my business?”
From a lender’s perspective, knowing that the borrower has gone through that process is almost as important as seeing the cashflow forecast itself.
Character – let your light shine
Lenders are being more careful in their assessment of the quality of each borrower, and it’s not just about credit history.
Ok, credit history is very important. That’s your reputation for repaying debts, after all.
But, alternative lenders are looking for ways to say yes, whilst managing risk, and so other aspects of character are being considered. Showcase all the aspects of your business character that make you a good borrower:
- Credit history – if your credit history is good, then make that abundantly clear. But if it is not perfect, it doesn’t automatically negate your borrowing potential. Be transparent. Provide a rationale for the lower score. Show your commitment to improvement and how you plan to repay new debt.
- Response to the pandemic – survived the pandemic? Ready for recovery? Congratulations! You’re resilient. Tell that story.
- Real estate – even if property is not required as security against a loan, lenders are more inclined to provide unconditional loans when a borrower owns property. Anything that shows you are a safe bet for making payments.
- Track record of business success / expertise – show you have made a positive return in the past, even with a different business. Your business track record can have a positive impact if you are borrowing to support a pivot, change or diversification i.e. a business move that leverages past success.
One final tip: look for a lender that doesn’t just let AI make its decisions off the back of an online form submission. A good lender will let you state your case.
