Obtaining bank financing

Most businesses need investment to help them grow, or to develop new products and services, and this almost invariably means looking at external sources. These can include private individuals, venture capitalists, business angels and banks.

You will find it much easier to get finance if you and your business are well prepared and if you know what you need, why you need it, and can show the benefits for both the business and the investor. This guide outlines the ways of preparing to seek funding, particularly from banks. It also explains about the importance of credit ratings for your business and yourself.

If you are not properly prepared, your application may not be successful. This guide also explains how to deal with possible rejection by banks.


Deciding whether you’re ready for financing

When you seek finance for your business, you will give yourself the best possible chance of success if you are clear about your business’ requirements.

Why do you need funding?

It may be to finance business expansion, to develop or exploit new products, for new premises or a number of other reasons. It should be for something specific, and be carefully costed. Banks will want to know the business case before they agree to supply funding, so you should think about the reasoning, the potential outcomes of the investment and how you will repay the finance.

How much funding do you need and when will you need it?

Although it does not make business sense to borrow more than you need, you should be careful not to underestimate – aim for the optimum amount. You should also consider whether you need all of the money at once, or whether staged amounts would work, as this may reduce the cost of borrowing with lower interest costs and initial repayments.

How are you going to repay the borrowing?

You will need to repay the loan in the future, with interest. Ask yourself when you are likely to start seeing a return on your investment, and how much the monthly repayments will affect your cashflow. Could you justify delayed repayments (which are likely to be more expensive)?

What is the right source of finance for you?

There are several different types of investment finance, and you will stand a much greater chance of securing financing if you can clearly explain why the source you are approaching is most appropriate for you, and any potential drawbacks.

For more information, see the page on types of bank finance for business in our guide on bank finance.

Bank finance may not be the best option for your business and there are a number of alternatives available to you.


What banks look for in a business

All investors assess applications for loans or investments using different criteria, and you should ensure you are aware of any specific requirements before making your application to particular lenders or investors.

However, if you are applying for finance from a bank or just setting up a new business bank account, there are some general points that almost every investor will want to take into account:

  • a good financial track record and credit history for you and your business – see the page in this guide about credit rating and scoring
  • a good management team with the right skills and expertise – involve your senior team from the start
  • a business plan that shows clear thinking on ideas and strategy – this is an essential tool for your business and should include up-to-date financial information
  • commitment from management and (as appropriate) other shareholders – the investor will need to be assured that the investment is one that everyone at the top of the business is happy about
  • security – most lenders will want their money to be secured against tangible assets, so they can be sure of getting their money back
  • your understanding of your market – the investor will probably want to make their own investigations of the market, but will need to know that you understand it as well

Even if your proposition is good, there are some things which will weigh against an application for loans or other funding:

  • unauthorised overdrafts
  • missed loan repayments
  • County Court judgements against the business or its directors
  • adverse credit rating data, against the business or its directors

There are also some factors which would automatically disqualify a potential borrower. These include:

  • a history of illegal activity on the part of the business or individual
  • if the business is in administration, or the individual has bankruptcy proceedings in process against them
  • where the potential borrower is under the age of 18
  • when the business could pose a risk to the reputation of the bank

Business Finance Taskforce

Six of the UK’s largest banks – Barclays, HSBC, Lloyds Banking Group, Royal Bank of Scotland, Santander, and Standard Chartered – have formed the Business Finance Taskforce. Working with government, they aim to provide better access to finance with a particular commitment to small and medium enterprises, as well as providing better information and improving relationships with customers.

In addition, micro-enterprises – businesses that employ fewer than ten people and have a turnover of less than €2 million – are covered by the Lending Code. It is a self-regulatory code setting minimum standards of good practice on loans, credit cards and overdrafts, and commits providers to dealing fairly, responsibly and positively with customers.


Preparing for a loan or overdraft

An overdraft can help you manage day-to-day spending, and may be particularly useful if the cashflow of your business varies a lot, whereas loans are usually more suitable for funding specific investments. Before you approach your bank for either an overdraft or a loan, you need to do some preparatory work. For more information, see our guide on bank finance.

In particular, you need to have a clear idea about how much you want to borrow, what it will be used for, and how it will be repaid.

You will need to support your application with information that the bank will request, and which will include your financial records, business plan and details of any security offered. You will need to have a clear idea about your requirements and be able to talk about your longer-term plans, so that the bank will appreciate their role in your business now and into the future.

It might be helpful for you to get advice from your financial adviser or your accountant, who are usually experienced at helping businesses apply for loans and overdrafts. Having your accountant at meetings when you apply for finance is also likely to give the lender confidence in you and your plans.


Credit rating and scoring

Most banks have a system for checking a business’ credit rating and score before deciding to lend money. If you understand how this system works, you may be able to tailor it to your advantage.

Credit scoring

Credit scoring calculates the statistical level of risk for a loan based on the information you provide, information from other agencies, and a sample of accounts similar to yours. These samples are obtained from the lender’s own records or from credit reference agencies. This comparison is then used to generate a total ‘score’. This score can determine whether you are accepted, or if you are accepted, it could determine how much you are loaned.

For large amounts, banks tend to rely on credit scoring, though they may consider other factors as well – eg your income and existing commitments, any security offered or their previous experience with you.

Credit scoring does not single out any specific item as a reason for rejecting an application, so you may not be able to identify exactly what the issue was. However, different lenders have different scoring criteria so being turned down by one provider does not necessarily mean you will not be able to obtain finance elsewhere.

Credit rating

A good credit rating is vital if you are seeking funds or want good terms for trade credit. It is therefore important to know your credit rating, and if necessary take steps to improve it.

Credit ratings are based on various things, including:

  • previous credit performance – whether you have kept up to date with loan repayments or stayed within overdraft limits
  • the key financial indicators of your business – eg liquidity, solvency and profitability
  • whether your accounts are filed on time
  • whether you or your business have had any adverse County Court judgments
  • your trade payments record

You can do a number of things to improve your credit rating, including:

  • making sure credit reference agencies have all the relevant information about you
  • filing accounts, change of directors and other statutory requirements on time
  • filing full rather than abbreviated accounts if possible
  • reviewing your business capitalisation regularly
  • retaining profit within your business – to show a commitment to the future
  • maintaining a good trading relationship with your suppliers

There is no guarantee that your application for finance will be successful – credit scoring systems vary between finance providers and you may be accepted by a lender that has different acceptance criteria.

Download the Department of Business, Innovation & Skills’ (BIS) and the Institute of Credit management’s guidance on improving your credit rating (PDF, 152K) – Opens in a new window

If you have been refused finance for any reason, there may still be finance options available to you. For more information, see our guide on non-bank finance.


Applying for bank finance

When you apply for a bank loan or overdraft, you should take a step-by-step approach to make sure that you give your application the best chance of success. Banks often have requirements checklists on their websites, or you can use this checklist as the basis for your application:

  • Background – explain, in writing, the key details about your business, including ownership, management team (including its experience), history and growth development. You should also identify the most important influences on your business, including your main customers, key suppliers and major competition.
  • Purpose – explain in detail why you want the loan or overdraft, including an indication of your aims and objectives. If you have had loans previously, explain what they enabled you to achieve.
  • Risks – demonstrate that you know and understand the risks that might impact on your business, and show how you have taken steps to reduce their effect, as far as possible.
  • Finance – explain who looks after your business’ finance, outlining their experience and qualifications. Show that you have solid financial systems in place.
  • Accounts – you’ll need to provide financial data. Most banks will want to see annual accounts for the previous three years, as well as management accounts, budgets and forecasts. If you are a new business, or if you are moving to a new bank, you will need additional information such as previous bank statements and figures showing your personal financial situation.
  • Amount – outline what funding you are seeking, including what it will be used for. If you are looking for an overdraft, make sure it takes into account your needs for the foreseeable future.
  • Funding structure – the bank or your accountant will be able to help you decide the best type of finance. It is important to have the right kind of funding structure to cover both working capital and capital investments.
  • Repayment – you need to be clear about how you are going to repay the borrowing. Be realistic about your business expectations and cashflow, and avoid being over-optimistic.

Security

Banks will often require your loan or overdraft to be secured when borrowing larger amounts. This can include charges over property or the company’s debtors, personal or third party guarantees, or government support. You may also be asked to insure yourself and other key stakeholders to cover accident, sickness or death.

Professional advice

Your accountants, solicitors or trade bodies can provide help in structuring your case, and the bank itself will probably be able to help with loan documentation. For information on finding professional advisers, see our guides on how to choose and work with an accountant and choose and work with a solicitor.

You can also find guidance on how to improve your chances of getting a bank loan on the Better Business Finance website – Opens in a new window.

Every effort has been made by the author(s) to ensure this article’s accuracy but it does not constitute legal advice tailored to your circumstances. If you act on it, you acknowledge that you do so at your own risk. We cannot assume responsibility and do not accept liability for any damage or loss which may arise as a result of your reliance upon it.