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Every day, the papers tell us that the banks are being urged to lend more money to small businesses. There have been plenty of schemes to this end since the banking crisis in 2008 - the semi-successful Project Merlin, for example.
I would like to see banks lend more money: they will be supporting entrepreneurship, a start-up culture, and therefore jobs and the economy. But banks are not fools despite the last few weeks' press coverage. If they are not lending, it is with good reason. We are in the middle of a recession, the banks are conservative and bearish, and if you are going to squeeze a loan out of them, you are going to need all your powers of persuasion.
It's probably therefore a good idea to avoid the bank if at all possible. The 'bank of Mum & Dad', friends or family is definitely the place to start looking for money. They will give you better terms, too...
But securing a business loan from a bank is not impossible. The bank manager is, if you are lucky, a businessperson. Admittedly, sometimes a computer now makes these decisions, but they too can be persuaded with the right numbers. Demonstrate that your business will yield a financial return and that you are a trustworthy pair of hands and they will be prepared lend you money.
The bank will want to see a business plan. It is the kind of document that is enough to make entrepreneurs run a mile, but the business plan is a pill you are going to have to swallow.
In your plan, you will need to cover several areas, including:
- an overview of your business activities
- an outline of the customer base you plan to sell to and how you're going to reach them
- your management team or expert advisors
- a 12-month forecast of your costs and sales.
Most entrepreneurs will be comfortable with evangelising about their businesses - after all, getting excited is what we do best. Unfortunately, turning that enthusiasm into a financial forecast is another story. So if, like me, you are lousy with money, make sure you get a finance cornerstone to help create figures that are credible, and present these figures in a language your bank manager will understand.
You are probably wondering how you can commit to sales figures for 12 months down the line when anything past next week is a bit of a mystery. I believe that most sales forecasts are a fiction; a best guess at best. But that is not an excuse for wild exaggeration: the key to a loan application is credibility. Stick to a sensible approximation, and back that approximation up with logical argument. Again, taking a finance cornerstone into the meeting with your bank manager will do just that.
Your finance expert offers plenty more benefits too:
- Bank managers know that a finance cornerstone will keep you on the straight and narrow.
- They know that your finance expert wouldn't represent you in person if they thought you were a bad prospect.
- Bank managers are not entrepreneurs; they are finance people too. Bring your finance guru in, and they will make friends and speak each other's language.
- And if nothing else, you will compare favourably with the many "great idea, no clue" people who make up the majority of a bank manager's visitors.
Most of us cannot afford a full-time Finance Director, but that's no problem. Look for a virtual finance cornerstone for as little as one day a month. A good example of a company who provides this service is The FD Centre (www.thefdcentre.co.uk ), who support this e-zine.
Alternatively, you can ask your bank manager to recommend a local person to act as your virtual cornerstone. Adding a bank-approved member to your core team is bound to boost your chances of being approved for a loan.
Failing that, get out and network. Speak to people in your local business community - someone somewhere will be able to recommend a finance cornerstone.
The other powerful way to give your loan application credibility is to provide evidence of real customers. This includes:
- Letters of intent to buy, e.g. "MegaCorp Ltd. will commit to 15 widgets in 2012"
- Invoices or purchase orders
- Or best of all, real money. An upfront deposit from a customer goes a long way to demonstrating that a business idea is viable.
When I co-founded a company back in 1984, our first customer gave me £10,000 upfront for a job - because they trusted me as an individual. Depositing real cash in the bank gave the fledgling company credibility; enough to secure lending and give it a kick start into the market. If your finance guru can walk in with proof of real customers spending real money, it will give you immeasurable kudos.
The key to a loan is maximising credibility and minimising risk. Bolster your pitch with financial expertise, evidence of customers and preferably hard cash. Do everything you can to convince the bank manager that the business is stable, you are a safe pair of hands, and smart enough to get help from experts when you need it.
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