One of the biggest challenges start-ups and fledgling businesses face is securing the funding they need to realise their potential.
A majority of business owners feel that finding finance is difficult in the current climate, and in particular, that banks are reluctant to provide business loans at competitive rates.
So to help you maximise your chances of getting that all-important business loan, we asked Rishi Khosla, the CEO and co-founder of OakNorth Bank – a bank that specialises in lending to entrepreneurs and growth businesses – to share his valuable insight and personal experiences with ByteStart readers;
1. Bricks and mortar is not the only collateral out there – good, strong cash flows can take you pretty far
Most banks will fixate on your collateral – that is the security you can provide to support your loan. They may hardly understand your business but as long as you, or your business, are property rich and they can collateralise it (i.e. sell it if things are going wrong), they will give your business a loan.
What if your business is not property rich? And perhaps you object to your own house or property becoming the security (this happened to me by the way – in 2005 I was trying to raise £50,000 for my previous business, Copal Amba, which had very good cash flows, and I was told by a High Street Bank, “Sure, but with a charge on your house.” – a frustrating moment to put it mildly!)
In this day and age, with more and more business owners in the UK starting from home (60 per cent last year) and fewer and fewer businesses needing a commercial property in order to operate, this is an issue that many small business owners are facing.
The most important factor should be the strength of a business’s cash flow and its ability to repay the loan; if these are strong, a bank should look to support them on an unsecured basis.
If security is required, particularly for larger loans, then encourage them to look beyond property and towards your other assets such as stock, debtors, fixtures and fittings, plant and machinery, or intellectual property.
2. Your business plan, financial plan, and presentation says a lot about you
When applying for a loan, a strong and coherent business plan, and clear presentation of that plan are essential. If your plan is not clear enough to be put on a piece of paper, it’s better not to apply for a loan and burn your chances.
The quality of your business plan will reflect a few things about you:
- Your thought process and logic,
- Your thoroughness,
- Your determination and grit, and
- Your presentation skills and ability to make things look attractive.
All of these attributes are crucial for any entrepreneur trying to build a business. So invest the time to get it right. You only have one shot to make that critical first impression.
A strong business plan should include: detailed information about your business structure, ownership, location, future plans (both in terms of reach and scale), key customers and suppliers. It is also worth including information on market trends you’re seeing that are particularly pertinent to your business.
Spend time thinking about and calculating how much money you will need to borrow, how you’re going to use it, how your business will change given financing, and demonstrate how you will generate the additional cash to pay interest, and how you might repay the loan at the end of the term. Be clear and realistic.
One more thing: be ready for an intensive Q&A! Lenders who look at your business plan will have all types of questions about the business so be ready and on your toes. The ability to answer questions logically and thoroughly will give the lender confidence that you know your business.
3. Lenders will want to see that you have ‘skin in the game’
To put it bluntly, lenders want to know that if things go badly you have something to lose, both in reputational and money terms.
Therefore, lenders will generally want to understand how much you have invested in your business, and if your family and friends have invested in it too.
Skin in the game is a reflection of commitment. And strong commitment means you will go the extra mile to make your business work.
4. Seize any opportunity you have to showcase your skills, successes and progress
When you are applying for a business loan you need to think about they’re the types of questions a potential lender might ask you. These will probably include;
- Do you have a background in the sector?
- Have you got a proven track record in business?
- Do you have a strong personal credit score?
- Have you successfully applied for, and paid off, a loan in the past?
For each question, think about whether your answer is as strong as it could be, and if there is anything you could do in the short to medium-term in order to make it stronger.
5. If at first you don’t succeed, try and try again
You can react to failure and adversity in two ways:
- Quit, or
- Become emboldened to succeed.
If your loan application gets rejected, go to the person at the bank and try to understand what went wrong. Don’t settle for the canned corporate message. Sit down with them and try to get some real information. This is the only way you’re going to know what to change next time around.
Once you understand what went wrong, make the required changes to your materials / presentation / pitch and move on. There are many sources of debt finance out there.
I’ve been here myself in 2003, when I had just left the corporate world and was trying to grow a business. I must have heard, “No” 50 times for every “Yes” (from customers, from potential employees, from potential investors, from everyone really).
I kept going. Failure was not an option. I kept refining my technique, and over time, the ratio of “No’s” to “Yesses” started improving. I made it through with sheer determination and grit, so you can too.