Before the anticipated economic slump renders an increasing number of companies uncreditworthy, small company owners are advised to submit financing applications.
The capacity of many SMEs to qualify for financing might be severely harmed, according to UK Finance, the trade association for British banks. These factors include increasing interest rates, inflation, and a potential recession.
Therefore, even if they do not want the additional funds, SMEs are urged to determine how much cash they may need to withstand a downturn and apply for financing now.
“If you wait until the slump has struck and discover you are in urgent need of financing, it may be too late,” said Stephen Pegge, managing director of commercial finance at UK Finance.
To build a financial cushion that will endure the next year or two, it is preferable to plan and take action today. In this manner, you will have enough time if requested to provide further details supporting your application. Additionally, your company will likely seem to be in better form, as will your clients’ financial situation.
According to recent research, many businesses are already being denied financing. According to a survey published earlier this month by the Federation of Small Businesses (FSB), just 43% of enterprises that asked for financing were granted a record-low percentage in the first quarter of the year.
UK Finance contests this number and contends that the approval rate is closer to 75%.
However, there is no question that financing businesses will grow more cautious if business circumstances worsen, regardless of the reality earlier this year.
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 of 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 could be required to provide a cash flow prediction that compares revenue and costs for the duration of the loan arrangement. Unfortunately, since no one can predict the pricing trends for the next six to twelve months, it is becoming more and harder to create reliable costings. If this is a concern, provide a range and describe how your company would do in the worst-case situation to convince the lender that you have considered every possibility.
#2: Display customer contracts or orders in writing.
If you can demonstrate that you have a particular volume of business that is effectively guaranteed by your clients, gather the supporting documentation to provide to the lender upon request.
#3 – Put up security
If your business is still relatively young, the lender may need of personal guarantees, which hold the borrower personally accountable for the loan, as security. If you cannot repay, this might jeopardize personal assets like the family house. It’s a large commitment, and you risk going bankrupt if your company doesn’t succeed. However, your likelihood of obtaining the money you want will significantly rise if you have trust in your company.
#4: Establish a solid credit history
Younger businesses often face the issue of having no established credit history. Therefore, even if you do not need credit, it may be a good idea to establish one.
If you anticipate needing sizable financing in the future, for instance, you may want to think about taking out a few smaller loans to cover the cost of company expenses, even if you have the cash on hand. By doing this, you may build a solid credit history that will increase your chances of subsequently getting accepted for a larger loan.
#5 – Tidy up your bank statements
To evaluate the firm’s status, some lenders may need to view three or six months’ worth of bank statements. Delaying major purchases until after you have acquired financing might thus pay off and make your bank statements seem healthier. This is only excellent housekeeping; there is no ulterior motive.
#6 – Take into account finance to balance cashflow
Numerous financial strategies have been developed expressly to assist with cash flow issues. There are uncomplicated cash flow loans that are often unsecured and granted based on the business’s past performance and prospects. But they nearly usually call for personal guarantees, much like many other company financing plans.
Alternatives include asset and invoice financing. These are backed by your unpaid bills or company property, including equipment. Even with assets or bills as security, lenders often request personal guarantees. Who wants a used embroidery machine for £80,000, for instance? Too many lenders are left with specialized industrial equipment they can’t sell. Their argument is clear.
#7: Consult a broker
Because they are familiar with the lending standards employed by the different financial institutions and can swiftly connect you with the lenders that best meet your demands, business finance brokers may be quite helpful. There are other additional forms of financing and loans that I have not listed here, making business finance a veritable labyrinth. Brokers are in a good position to provide advice on financial items that you may not even be aware of.
Additionally, they aid in preventing time loss caused by unsuccessful loan applications to lenders that utilize algorithms to weed out unnecessary applications. Companies like Funding Circle, Capify,, and Fleximize, among many others, use algorithms to evaluate different aspects of your application. The specifics of what these computer systems are checking for vary from company to company; some check for County Court Judgments (CCJs), some check the status of your VAT payments, and some check your most recent financial statements or position with Companies House.
Without knowing the requirements, you can spend time visiting companies that would never consider your company if you applied for financing.
Brokers may be a terrific shortcut and can often locate financing even if your credit history is less than ideal. The drawback is that they charge an average of 5% to 7% of the borrowed money. But for many, the cost is worthwhile.
