Borrowing hit record levels in 2020 with almost half of the UK’s small and medium-sized businesses seeking out financial support – more than three times the level of the previous year – amid the coronavirus pandemic.
An annual report on SME finance by the British Business Bank (BBB) found that 43% of SMEs received external financing last year, compared to just 13% in 2019. The funding included emergency loans and grants made available by the government to businesses during the pandemic.
The annual Small Business Finance Markets report shows that borrowing hit record levels in 2020, with gross bank lending up 82% year on year to £104bn.
With fears that businesses will struggle to pay back the borrowed funds, the government has announced the option of paying the total sum back over 10 years rather than six. It has also allowed them to choose to pay only the 2.5% interest on the loans.
With lenders ordered to provide more sympathetic repayment terms, this could reduce the amount of funding available to businesses that have yet to seek external finance. At the very least, businesses will need to prove strongly that they don’t present a significant risk.
Here’s how can you put forward a strong application for business finance, as per the British Business Bank:
Understand your options
The first thing you need to do is get a firm grasp on the finance options available to your business, in the context of where it is in its journey. For example, if you’re a start-up, you need to be aware that you probably won’t be able to get an unsecured business loan without some reasonably strict repayment terms.
So, you’ll typically have to pay more interest with unsecured loans. An unsecured business loan, then, is a viable option if you only need a small amount such as £20,000.
You also need to be aware that unsecured borrowing is almost always supported by a Personal Guarantee, and it’s common for lenders to ask for personal guarantees to act as security against a secured loan too.
Show a strong cash flow
If your business has been trading for a year, you’ll naturally be in a stronger position than you were 12 months ago, as you’ll be able show potential investors your cash flow.
Banks and building societies will want to see evidence of a strong cash flow, as it provides reassurance that your business can meet loan repayments. As well as showing cash flow for the previous year, create a three-year cash flow forecast – how you think your business will perform over the next 36 months – to underline your business’ capability to repay the loan.
Demonstrate your industry knowledge
Don’t expect the conversation with a lender to solely be about the financials. Lenders will also try to make your judgement of you as a director – they want to see if you know what’s happening in your industry, what trends are emerging, and the potential market threats and opportunities that could affect your business.
Carrying out a SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis of your business will show you’ve done your homework and you’re thinking about what’s required to future-proof your business.
Get character references
You can’t do enough to show yourself as a competent and successful business owner – it’s as much about proving your personal credentials as it is the viability of your business.
To build a positive image of yourself as the business owner, obtain endorsements from people you’ve done business with in the past that you can carry into the meetings with the lender.
What if you’re asked to sign a personal guarantee?
Personal guarantees give the lender a written promise, made by a director or number of directors, to accept liability for a company’s debt. In practice, this means that if the business defaults on a loan (or lease), the director’s home, car and anything in their personal bank account may be at risk.
Your spouse or partner will have to sign the guarantee if they co-own the family home, so it’s vital you seek sound legal advice before making such an important commitment.
Most guarantee forms require joint and several liability. This means that each individual who signs a guarantee can be liable for the whole amount of the loan.
Make it a priority to find out what signing that guarantee means for you personally, and if it is the only way you can realise the objective of financing a business, consider taking out insurance to cut the risk of financial loss.
Currently, Purbeck is the only insurer offering personal guarantee insurance to small business owners which can be purchased for an existing guarantee, or as finance is taken out. Cover provides up to 60% of the debt value in year one, rising to 70% in year two to a maximum of 80% in year three, and premiums can be flexed depending on the policyholder’s credit rating. The small business owner also has access to specialist business advisers throughout the policy.
Contact Purbeck today to find out your cover options.