Applying for a Bank Loan

It is sometimes said that banks are reluctant to lend to small business. However, if there is any discrimination on the part of banks, it's against poor lending risks and undeveloped or badly prepared borrowing proposals, and not against small business.

The fact is, trading bank loans form the most important single source of funds for small business. In preparing a request for finance, it's essential that you prepare a detailed and thorough business plan and fully inform the bank on all matters related to the proposed venture. This information is essential for the bank to help it make a decision, and provide you with the right type of finance and advice. A detailed business plan helps both you and the bank.

Details on loan applications

Loan applications require a lot of information. You should gather all the important details that the bank will need to know, including:

• how much money you require and the reason for the amount you need
• how the amount of money was arrived at (include copies of quotes where appropriate)
• what security can you offer for the loan - do you have a guarantor?
• what is your projected profitability? (in projecting profits, allowance should be made for reasonable contingencies)
• your projected cash budget for the following 36 months. The budget should include estimated interest and principal repayments on the proposed loan
• details of all existing personal or business borrowings

If your business is already developed, and you are approaching a bank for funds to expand or for some new development, you will need to supply records of past financial performance. Records of a successful earlier business will also help in establishing funds for a new venture. The bank will be interested in:

• latest balance sheet or statement of business assets and liabilities
• latest profit and loss account or a copy of your latest tax return
• details of previous years' trading performances (three years if possible)
• dissection of debtors by age and amount owing
• dissection of creditors by age and amount owing
• basis of stock valuation

Plan the business, plan the finance

Banks require a lot of in-depth information related to the financial history of the business, but it's also important for you to create a convincing and detailed business plan, as much for your benefit as for the bank's.

The information you use as the basis for this plan may also be required by the bank for its assessment of your project. Consider the following points:

• the history of the business
• the experience and qualifications of the owners/directors
• details of personal assets and liabilities of the owners/directors
• how do you see the future of the business in three or five years?
• will you set goals for yourself and your employees - are their job descriptions clearly defined?
• how and when will these goals be achieved?
• how deeply have you researched the market in which you operate or intend to operate?
• will you have a reliable management information system in place, to keep you up-to-date and informed as to progress, and the position of your business?
• have you considered a contingency plan to compensate for market changes, availability of stock, materials and other external factors that may affect the operation of your business?

These are just a few of the matters on which a bank may seek clarification when you are applying for finance, but they form an essential part of your business plan.

The outcome of your application will be strongly influenced by how well your proposal is researched and how well it is presented. You must be able to demonstrate that the proposition:

• is practical
• will be successful

A demonstrate that the business will be sufficiently profitable to service all borrowings and still have an adequate margin for taxation and owners' drawings.

The bank needs to be confident in the project. You should always be prepared to accept sound professional advice on matters which will help make the enterprise successful and profitable.