Raising Money - What lenders look for before handing out cash

You seek to borrow funds from banks, business angels or government agencies. While they make money by lending it, they also want to know that it is safe in your hands.

Main factors

Poor management skills are the reason 80% of owner-managed firms go to the wall. So that's the first thing lenders look at when considering a loan.

Before they will lend money, lenders also want to see that you have:

• A good track record;
• The expertise and skills to adapt to changing financial and economic circumstances;
• A good product or a quality service;
• Good financial controls;
• Ideally, growth prospects;
• The ability to repay the money.

All lenders will want to see a business plan. Among other things, this will explain why you need the money, how much you want and for how long.

Include cash flow projections to demonstrate how the loan will be serviced and eventually repaid.

Both the business plan and the cash flow forecast need to be realistic. Lenders are sceptical of over-optimistic forecasts. It's better to be cautious.

If an accountant has prepared your cash flow forecast, lenders know the figures will add up. However, they will want to know that you have a real understanding of the rationale behind the figures.

Assumptions and alternatives

Projections are based on assumptions, so you must say what these are. Lenders question everything: it's their job.

Many business plans fail to impress lenders because they fail to:

• Consider all eventualities;
• Come up with alternative strategies should problems arise.

Ultimately lenders have to decide whether a proposal is viable, based on your past performance and their knowledge of the market. So if you are an established business, lenders will want to see your annual accounts (ideally for the last three years) to review historic trading performance and identify any trends.

The current position

Then lenders will want to know your up-to-date trading position and to see regular management accounts. They will also want to look at bank statements and VAT returns.

Balance sheets represent a one-time snapshot of the business. So lenders may dig deeper to find the real cash-producing capacity and the extent to which any liabilities might become real.

They'll also want to know the true rather than book value of assets, should it become necessary to consider a forced sale.

Notwithstanding your budgets and cash flow forecasts, lenders will use some basic tools to assess your plans, such as a simple break-even analysis. At the very least, you should be able to provide a rough figure for overheads and other fixed costs, and an assessment of the gross margin expected on sales.

Lenders worry about over-reliance on too few suppliers and/or customers - often a major problem for small businesses. This is where a late payment of a big invoice could destroy your cash flow. And a key customer going bust is often fatal. If this is your situation, your business plan should show how you intend to rectify this weakness.

Security and commitment

Security is an important aspect of a lending decision although it is never the main factor. It is there to provide a guarantee of repayment should all else fail.

Some lenders feel that a director's guarantee supported by personal assets is enough. Lenders like to see owner/managers invest their own money in their businesses. It's also a fallback against potential losses. However, while this may show commitment, it's no substitute for adequate capital resources. Insufficient capital or under-capitalisation are also major contributors to many business failures. So asking for too small a loan may be counter-productive.

Structuring the debt

Many small businesses rely on an overdraft when they might be better off with something more structured, like a term loan.

A lender may even suggest you do not need to borrow at all: factoring invoices, hire purchase or leasing may be better ways of releasing cash.

Lenders' favourite tipple

Every lender will look at seven key areas before lending - CAMPARI:

• Character - do you give the impression you will make your plans a reality?
• Ability - do you and your people have the right skills and experience?
• Means - what are the business's and your own personal assets?
• Purpose - what is the purpose of the loan? Is it for a sensible cash-generating plan? Few lenders will lend money to pay debts or to give yourself a nice pay rise.
• Amount - ask for enough money, but not for more than you need. What funds will you put in to reduce the lender's risk?
• Repayment - prove you will be able to repay the money with a realistic cash flow forecast.
• Insurance - lenders are wary of under-insured businesses. An uninsured loss could destroy you, after all.

This article was first published by Better Business magazine, which offers practical proven ideas to help owner-managers transform their business, and have more fun doing it. Find out more at Better Business.