Small business owners are being urged to apply for finance before the predicted economic slowdown makes increasing numbers of businesses uncreditworthy.
UK Finance, the trade body for British banks, said that rising interest rates, soaring inflation and a possible recession could have a devastating impact on the ability of many SMEs to qualify for credit.
SMEs are therefore being advised to assess how much money they may need to survive a downturn, and apply for finance now, even if they do not need the extra funds immediately.
Stephen Pegge, managing director of commercial finance at UK Finance, said: “If you wait until the downturn has hit, and find you are in urgent need of finance, it may be too late.
“It is better to think ahead and act now to get a financial buffer to last the next year or two. That way, if you are asked to provide any additional information to support your application, you will have time to do so. And your business – and the financial position of your customers – will probably look in better shape.”
Recent data shows many companies are already being declined finance. A report released earlier this month by the Federation of Small Businesses (FSB) reported that a record low proportion of just 43 per cent of firms that applied for finance were approved in the first quarter of the year.
UK Finance disputes this figure, suggesting the true proportion of approvals is around 75 per cent.
But whatever the reality was earlier this year, there is little doubt that finance companies are likely to become more cautious as business conditions deteriorate.
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Improve your chances when you apply for finance
There is no one-size fits all approach to business finance, since nearly all loans and credit facilities are negotiated individually, depending on the company’s unique circumstances.
Generally speaking though, banks and specialist lenders will take different views for newer companies when compared to more established firms.
If your company has been trading profitably for some time, you may not be asked to put up any security or personal guarantees – banks may be happy to lend based on your good credit record, solid repayment history and healthy profitability.
However, most banks will also look ahead at your prospects and the evolving economic environment, so the more evidence that you can produce to prove you are a good risk when you apply for finance, the better.
7 top tips to get your credit application approved
#1 – Prepare a cashflow forecast
You may be asked to produce a cashflow forecast, with income and expenses set against each other for the period of the finance agreement. Unfortunately, rapidly rising prices are making it increasingly tricky to produce accurate costings, because nobody knows what prices are going to be in six months or a year’s time. If this is an issue, show a range, and explain how your business would cope in the worst-case scenario, which shows the lender you have thought through all eventualities.
#2 – Show customer contracts or documented orders
If you can show that you have a certain amount of business effectively guaranteed from your customers, collate the paperwork to provide to the lender if asked.
#3 – Put up security
If you are a relatively new company, the lender is likely to want some security in the form personal guarantees, which make the borrower personally liable for the debt. This could put personal assets such as the family home at risk if you cannot repay. It’s a big commitment – if your business struggles then you could end up being made bankrupt. But if you have faith in your business it will greatly increase the chance of getting the money you need.
#4 – Build up a good credit history
Another common problem for younger companies is they often don’t have an established credit history. So, it can be wise to build up a credit profile even if you don’t need to borrow for anything.
For example, if you know you are going to need sizeable finance at some point in the future, consider taking some smaller loans to pay for business items even if you could afford to pay for them in cash. This way, you can establish a good credit record that will enhance your chances of being approved for a bigger loan later on.
#5 – Tidy up your bank statements
Some lenders will want to see three or six months’ bank statements to assess the state of the business. It can therefore pay to defer any large expenditure until after you have secured your finance so that your bank statements look healthier. There’s nothing dishonest about this, it’s just good housekeeping.
#6 – Consider finance to smooth out cashflow
There are numerous finance schemes designed specifically to help with cashflow problems. There are straightforward cashflow loans, which are usually unsecured, and approved solely on the track record and prospects for the business. But in common with many other business finance schemes, they almost always require personal guarantees.
Alternatives include invoice finance and asset finance. These are secured on your outstanding invoices or business assets such as machinery. However, it is becoming more common for lenders to ask for personal guarantees even with assets or invoices as security. Too many lenders have been stuck with specialised industrial machinery that they can’t sell – who wants an £80,000 second-hand embroidery machine, for example? You can see their point.
#7 – Go to a broker
Business finance brokers can be invaluable because they know the lending criteria used by the various finance houses and can quickly match you up with finance companies that best suit your needs. Business finance is a minefield and there are many, many other types of finance and loans that I have not mentioned here. Brokers are well placed to advise you on finance products that you may not even have heard of.
They also help prevent wasted time with failed applications to lenders that use algorithms to filter out unwanted applications. Firms such as Funding Circle, Capify and Fleximize, among many others, assess various parts of your application with an algorithm, but exactly what these computer systems are checking for varies from firm to firm – some check for County Court Judgements (CCJs), some check the status of your VAT payments, some check your latest accounts or financial position with Companies House.
If you don’t know the criteria, you could waste valuable time approaching firms that would never consider your business if you apply for finance.
Brokers can be a great shortcut and can often find finance even if you have a less-than-perfect credit history. The downside is that they charge an average of 5 per cent to 7 per cent of the amount borrowed. For many, though, it’s a price worth paying.
Nick Gardner is a director at Air Exchange, the UK’s only money transfer auction platform for SMEs