Four Top Tips To Secure Your Business Loan

Many businesses are looking for loans to either cope with the crisis and/or to capitalise on some of the opportunities arising from it.

Lenders are being just as cautious, if not more than in the past, about who they lend funds to.

Any business wanting to secure a loan needs to impress the lender with their proposition and present their operation in the best possible light.

There are four things banks look for. If these aren’t available or are of a poor quality, a loan will be difficult to get approved.

1. YOUR FINANCIALS

It’s a ‘no brainer’ really, banks can’t lend on verbal promises or even a customer’s banking past track record. They must have concrete, timely and accurate information upon which to assess the risk of the business they’re lending to. Just because we’re in a crisis doesn’t mean they are suddenly going to turn into a charity.

2. ‘QUALITY’ FINANCIALS

Don’t fall into the trap of just asking your bookkeeper to print off reports without having them critically looked at by a professional, before handing them to the bank.

 I’ve seen some horrendously inaccurate financials being relied upon for business decision making, that have seriously brought those businesses unstuck. For example:

 a. Sales allocated to the wrong account e.g. a Balance Sheet account - therefore seriously understating profitability.

b. Loans allocated to sales instead of a loan account in the Balance Sheet - therefore overstating profitability.

 c. Loan repayments allocated to expense accounts in the Profit & Loss Statement - therefore understating profitability.

 d. Payments from customers being allocated to sales when paid - therefore doubling up on sales because the original invoice was also allocated to sales.

e. Sales not being properly invoiced, so no sales accounted for at all until payment made by customers - therefore seriously understating income and amounts owed by customers.

f. Jobs not being invoiced at the right time and costs against them being included in Profit and Loss Statement before jobs invoiced - therefore understating profitability.

 g. The list goes on and on!!

These types of mistakes make it very difficult to properly assess the profitability of a business for the owner, let alone a potential lender or investor. Expensive decisions are being made on poor information, that can bring businesses unstuck.

3. SATISFACTORY FINANCIAL PERFORMANCE

Accurate financials are a great start… but if they illustrate a poor performing business, they aren’t going to help you get the loan.

The way banks look at the situation is based on what they call ‘Ratios’. Don’t switch off just yet because this sounds like a technical term… let me explain what it means.

A ratio is taking one number and comparing it to another. For example there are 24 hours in the day and you spend 8 hours sleeping and 16 hours awake. If you divide 16 by 8, your ratio of sleeping time versus awake time is 2 i.e. for every hour of sleeping time you’ve got 2 hours of awake time.

 There are several ratios looked at by banks to assess business risk. A key one is called ‘Current Ratio’. This is a comparison of your Current Assets e.g. Bank Account, Customers that owe you money, Stock, Jobs In Progress etc. compared to your Current Liabilities e.g. Bank Overdraft, Suppliers you owe money to, Taxes, Short Term Loans etc.

If your Current Assets are say a total of $400,000 and your Current Liabilities are say $300,000 - you divide $400,000 by $300,000 and the comparison or ratio is 1.33. This means for every dollar of Current Liabilities, you’ve got $1.33 of Current Assets to cover them.

Banks generally like to see a ‘Current Ratio’ of at least 1 i.e. for every $1 of Current Liabilities they like to see at least $1 of Current Assets to cover them. So if yours isn’t at that level, they will question your ability to manage your own money, let alone theirs.

4. BALANCE SHEET UNDERSTANDING AND MANAGEMENT

Many businesses are run by looking closely at the Profit and Loss Statement each month. This is a good start, but it’s not the whole picture of the financial performance of a business. There’s another important report that can be a bit of a mystery to many people… the Balance Sheet.

If you want to not just survive but thrive when the crisis recedes, get someone by your side who has been through it before in much bigger organisations and can help you with each step of the way to the success you’ve been dreaming about. What if you had a great CFO by your side at a fraction of the cost of a full time one?

Make contact now and put your business in a position of dominance!

Rob Lancuba is a partner at CFO on Call, a leadership advisor, problem solver, Growth Specialist and Strategist. He helps businesses boost their profits, wipe out their competition, nail their perfect customer and put their business in a position of dominance! He has been through it before in much bigger organisations and can help you with each step of the way to the success you’ve been dreaming about! Email: [email protected] or call 0457 555 787

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