It’s a sad fact that the best time to ask for a business loan is when you don’t need it.
Lenders aren’t impressed if someone comes knocking when there are losses, not profits, in the pipeline - especially if the situation could have been avoided with better planning and more discipline.
So, how do you get yourself back into the game? Here are eight essential steps.
1. Find out how lenders see you.
Get your own credit reports from Australia’s three Registered Credit Bodies (RCBs) – Dunn & Bradstreet, Experian and Veda. The report actually shows your credit history, so regrettably the things that went wrong years ago may still be counting against you. There’s not a lot you can do about this, except ensure you have an accurate explanation ready and make your history look more respectable from now on. That said, mistakes do happen so check for information which is outdated, misleading or wrong get it corrected.
2. Track and improve your cash flows.
Cash is the oxygen of your business and if more goes out than comes in, the business expires. It’s not just a question of how much money – the timings of the flows are crucial. Do everything you reasonably can to bring forward inflows and delay outflows. Lenders will want to see your cash flow projections into the future as well as your cash flow statements up to now. They will want to see a cash flow management process which your business is adhering to. Don’t go to bed dreaming of the big profit you’ll declare on June 30, then wake up to find there’s not enough cash in the bank to pay wages next Thursday.
3. Improve your profit and loss position.
An up-to-date profit and loss statement will give you a snapshot of where the money is coming from and going to, and whether the company is performing in line with projections. Do you need to increase sales, or can you cut or delay expenses instead, or even do both? Act now to avoid any deterioration in profitability or to maximise profitability prior to applying for a business loan application.
4. Strengthen your balance sheet.
The liabilities side of a balance sheet shows where the money came from, while the assets side shows how you’ve put that money to work. Lenders look closely at a business’ liabilities, which include both the debt it will have to pay to its lenders and the equity which has been built up or invested by its investors (you). Some lenders like to see about the same amount of debt as equity. This is shown as a debt-to-equity ratio of 1 to 1. If the business has twice as much debt as equity, the ratio is 2:1, and the lender will wonder how the company can pay the interest bill from its earnings.
You can make your balance sheet stronger by paying down and improving that ratio. You might be able to sell off old equipment and lease new, or liquidate old stock. The cash you realise will be added to the company’s equity, and the seesaw will shift in your favour.
5. Package up your financial statements.
Lenders want to see finalised financials – cash flow statements, P&Ls and balance sheets – going back at least two years, plus the documents that support them (See point 6 below). You need your accountant to sign these off to assure the lender they give a true and fair picture of the business. Being able to provide all required information relatively quickly is an excellent first impression.
6. Tidy up your administration and paper trail.
You need to have documents which show how your business is tracking. You also need this to support any loan applications from creditors. If all you’ve got is bits of paper in a bottom drawer, pay someone to tidy up your financial records.
Ideally, each transaction should have a clear ‘paper trail’ which ensures each sale can be identified and verified. This typically involves ensuring that purchase orders, order confirmations, delivery confirmations and payment remittances are in order.
7. Draw up, or revise, your business plan.
Make sure your business plan is realistic, any assumptions are justified, and you can explain your business’ growth story clearly and bring it to life with your audience. You’ve got to know where you’re going before you can get there.
8. Do your homework, but don’t shop around.
Research the types of business loans available and work out which is best for you. Then compare the products on offer from the various lenders – but don’t apply just to find out what they might give you. Each application is reported to those Credit Reporting Bodies and recorded by them as a “hard inquiry”, as opposed to a “soft inquiry” when you apply for your credit score yourself. A flurry of hard inquiries on your record can make you look desperate, so play your cards close to your chest until you know what you want, then go for it.
