How to improve your loan application

Chris Pestell, Investment Director of Mercia SME Loans explains how to avoid the most common mistakes that companies make when applying for a business loan. As an investment director and former banker who has spent over 30 years liaising with companies seeking loans, Chris said it never failed to surprise him how many applications fall short of the mark. Here he sets out his top tips to help you when you are applying for a business loan.


  1. Think like a funder

Most entrepreneurs are passionate about their business and love talking about their line of work. While they may have developed a good grasp of finance, it’s usually a secondary skill and they are less confident in dealing with figures and forecasts.

By contrast, the figures are the focal point for investors. Of course, they will want to know all about the business, and most have a genuine interest in helping you grow, however, the first questions that will spring to their mind are: Is the company making money? What do the figures look like? In many cases when funders open your business plan, they will turn straight to the back to read the financials first.

It is useful to understand this difference in mindset when you are dealing with funders. Another consideration is that the person you are dealing with is unlikely to make a decision in isolation – no matter how much he or she believes in your business, their recommendation will have to be approved by a credit team, and they will need the facts and figures to back your case. If you can provide all the right information in the right format first time round, it makes it easier for them to put together their own report to the credit team and thus increases the chance of approval.


  1. Get professional help with figures

Given the difference in approach between business owners and funders, it is not surprising that the financial section of the business plan is where most problems arise. Businesses find it easier to explain their products and services and their modus operandi rather than produce financial data. Often, they don’t understand what type of figures they are expected to produce, and they don’t always employ the right people to help them.  This is mainly because they don’t see the value in getting this type of help.

Financial forecasting is a specialist area and is distinct from historical accounting. There is a real skill to producing a robust financial model that can be flexed according to the key performance indicators of your business.  A funder will want to know what would happen if the assumptions that have been made don’t work out as planned, so a well-constructed financial model which a funder can amend is extremely valuable.  It is well worthwhile using an adviser who has particular experience in this area – don’t assume that your current adviser is up to the task.


  1. Present figures in the right format

Given that the funder will want to be able to flex your forecasts and carry out sensitivity scenarios, submit them in a program such as Excel that allows this, rather than a ‘fixed’ format such as a pdf.

In addition to a cashflow forecast, an investor will also want to see a funds flow forecast. Both contain similar information, but are presented in a different way with the latter showing movements in working capital which helps to confirm that the business can afford to service the debt.

It’s also a good idea to include the key financial figures in a box in the introduction to the business plan. This will help to satisfy the fund manager’s curiosity and ensure their initial questions are answered at the start!


  1. Don’t try to cover up problems

One of the main reasons companies fail to provide the right information is that the figures highlight problems in certain areas of the business. This situation poses a real dilemma – do you leave out the offending set of figures and hope the funder won’t notice or include them and blemish your track record?

An investor will expect you to have some areas of weakness – in fact, I have never seen a company that doesn’t have some issues, so a too perfect set of figures may in itself arouse suspicions.

My advice would be, don’t try to cover up such problems but instead present them along with a plan on how you are going to mitigate them. This approach will help you build trust with funders from the start.


  1. Keep forecasts realistic

Every time I see a ‘J curve’ in the forecasts I wonder how the company is going to achieve it. Some companies believe they can change the world – but while setting high targets is fine for internal purposes, in your business plan projections it’s best to be realistic or a funder may regard them as unobtainable.

A funder will always look at historic patterns to determine how realistic forecasts are, so if you are forecasting significant growth and haven’t achieved this historically, you need to have some cast iron reasons as to why this will happen.


  1. Be honest about management skills gaps

From the business plans I review you might think that every company in the UK has a very strong management team – yet clearly that’s not true. After the financial section, it is the information on the management where most omissions occur.

Often business owners themselves do not want to acknowledge, or are not aware of, their own limitations. Again, it is better to be open and objective about gaps in management skills or experience and state how you will overcome these, perhaps through training or recruitment. An open approach, accepting of areas of weakness, will command far more respect from a funder.


  1. Don’t forget the competition

While the company information is generally the strongest section in all business plans, competitor information is just as important. Ensure that you identify them, assess their strengths and weaknesses and how their position compares to your own. This information will be checked during the due diligence process but it’s best to include it and give your own view from the start.

By following these seven guidelines you will make it easier for the lender to approve your application and give yourself the best chance of success. If you would like to apply for a business loan from Mercia then please fill out this application form.