December 19, 2024
Full articleYour business is expanding, so you need to financing to fund the growth. How do you convince a lender to give you a loan for your business needs?
Purpose of the Loan
First, give the lender a business plan. Show them that your business is solid and you have a strong track record of performance. Demonstrate to the Lender what you could do with the borrowing. Be specific about how much money you need, what you will do with it and how you will pay it back.
After the lender understands your business, the purpose of the loan and the method of repayment, he will evaluate the lender’s risks by using the five Cs:
- Character
- Collateral
- Capacity
- Capital
- Conditions
The Importance of Character
Foremost on the list is character. If lender doesn’t trust you or think you’re an honest person, they will not approve your loan request. It doesn’t matter how much collateral you have, it will not be enough to offset a lack of trust.
The lender needs the confidence that the borrower has the experience, education and industry knowledge to successfully manage the business. The borrower’s reputation plays a significant part in getting a lender loan. Your credit history will show your track record for repaying debts.
The Need for Collateral
When a lender makes a loan, it determines a plan of how the borrower will repay the loan. If the borrower defaults on the loan, then the lender falls back on the collateral. A lender never wants to use the collateral to repay a loan, because the sale of the collateral may not be enough to pay off the loan.
Lenders like to take property and assets as collateral as a way to recover their loan in the event the borrower fails to pay as planned.
Capacity to Repay the Loan
The borrower must show that he can repay the loan out of the company’s cash flow. The lender will analyse a company’s debt-to-income ratio and the amount of its free cash flow. Lenders like these ratios to provide a cushion in case the business takes a downturn.
The Need for Capital
Lenders feel more comfortable when the owner has his own money invested in the business. Lenders like to know the owner will lose something if the business fails. If the owner is not investing in his own business, why should the lender?
Lenders like lending to companies with a lot of capital because it means the owners have some “skin in the game.” When owners have more personal capital in the business, they will fight harder and sacrifice more to save a business and repay their debts.
Overall Economic Conditions
Beside analysing the borrower, lenders will look at the overall economy, industry trends and even the direction of politics. They are thinking about factors beyond the control of the business owner that will affect the performance of the company.
It is almost impossible to start a new business and finance its growth solely with internally generated funds and owners’ capital. At some point, small business owners will have to approach their lenders for loans. Understand the process that lenders go through to evaluate their risks before you apply for a loan.
Should you have any questions on any of the articles in this series please contact:
Craig Darling by email: cdarling@gilsongray.co.uk or by phone: 0141 530 2044/07841 920 467
The information and opinions contained in this blog are for information only. They are not intended to constitute advice and should not be relied upon or considered as a replacement for advice. Before acting on any of the information contained in this blog, please seek specific advice from Gilson Gray.
