Is a bank loan for you?
Bank loans are only one form of financing and are not ideal for many situations. Larger loan amounts are secured which means you could lose substantial business or personal assets should your firm fail. Consider the merits of private equity, government grants and other types of finance before applying for a business bank loan. You may also wish to look into the Enterprise Finance Guarantee (EFG) to see if you qualify. Also, make sure you’re at the right stage before applying; the investment must be required for something. Don’t just apply because for the sake of increasing liquidity.
Preparing your application
Before you apply for a loan there’s a lot that needs to be done. Producing a clear and cogent plan as to why you require financing is a lot harder than it sounds. Not only do you need to prove to the bank that the return is going to make a profit, but you also need to show that you have the acumen to make the business a success. You’ll need to bring many documents to the meeting, including business and personal histories, profit forecasts, five-year plans and expected ROI on the loan. CAMPARI: preparing for a bank loan is a must have read to ensure you bring everything you need to bring.
Approaching a bank
Once you’ve completed the necessary preparation it’s time to approach a bank. How you do this will depend on the bank, the loan amount and the type of company you represent. Consider approaching a bank in person to make a great first impression. Dress impeccably and double check your availability and that of any partners: you don’t want to have to rearrange an appointment. For lower amounts, and larger banks, you may wish to follow a standard online or paper application process. Double check all spelling and grammar before you submit the application.
Meeting the bank manager
Your bank manager will need to know some basic details initially: how much money you need, whether you can secure your loan against business or personal assets, and how long you want the repayment period to be. You need to explain the rationale behind your choices so be prepared to go into depth. Your bank manager may also want to know about you personally, your business, and other key information such as your business model and five-year plan. Make sure you have multiple copies of all documentation and that it is all formatted clearly and professionally.
Check the small print
Banks differ in the way they make a return from commercial loans. Some charge interest only whilst others include charges for setting up the loan and late payment penalties. You may also have to pay ‘redemption penalties’ if you choose to pay off your loan early. Ask the bank manager to total up how much the loan will cost, including all fees payable. This should give you an idea of how much the loan will cost your business across the entire repayment period. Compare quotes with other banks if necessary.
Wait for a decision
Applying for a loan is not an instant process and you’ll typically need to wait between three and six months to receive the capital. Try not to appear anxious or pressured as this will decrease the likelihood of your loan being accepted. Use the time to strengthen your business and plug inefficiencies so that when the capital arrives your firm will be in the strongest position to use it profitably.
Being rejected for a business bank loan can be extremely disappointing but it doesn’t have to leave you in the slumps. By working out where your application went wrong, and fixing these weak areas, you can return to the bank with a stronger case and a greater chance of getting the capital you require. If necessary, ask an experienced mentor to help you produce the strongest possible application – it’ll be worth it when the bank says yes. Take a look at our guide to why banks reject loan applications to see where you might have gone wrong.