Have plans to grow your business? Ready to invest? Here’s how to maximize your chances of obtaining financing.
After reviewing your business strategy, you’ve put together a plan that will enable you to achieve your growth objectives. For some it’s acquiring another company, while for others it could be constructing a new building, making Industry 4.0 upgrades or turbocharging their operational capacities. No matter what you’ve got planned, you’ll need a loan from a financial partner.
While applying for financing might seem simple, there are a few things you need to do first to make sure your application is properly supported and approved.
How to present your project to your financial partner
Discuss your project with your lender
The first thing you need to do is schedule a call with your financial representative. This simple step can help you gain helpful information on how to effectively prepare the rest of the process. The purpose of the conversation is to discuss the general outline of your growth plan and ask your lender what information they’ll want to see when analyzing your loan application.
Know what information to include in your request
Your lender should give you a list of information you need to provide. The level of detail will depend on your relationship with the lending institution. If you’re a long-term client and interact with your lender several times a year, they will mostly ask about the specifics of your plan. However, if you rarely contact them or you’re a new client, they’ll probably ask for information about your business and its history.
Set up a timeline
Your call with your lender is also a good opportunity to establish a timeline. Once you’ve submitted all the required information, find out how long it will take to complete the remaining steps, which include the financing proposal, final approval and disbursement of the funds.
If you have a well-structured plan and effectively respond to your financial partners’ queries, you’ll gain their trust and cut down processing times.
Small, medium or big project: assessing all costs
Consider all costs
The scope of your project is likely to influence the type of financial arrangement you obtain, and sometimes even the number of lenders involved. Therefore, it’s important to detail all the costs associated with your initiative, including indirect expenses. For example, if you plan to purchase new equipment, think beyond the purchase price. There’s also the cost of transporting and installing the new equipment, disposing of the old equipment and training staff on how to use it.
Plan for contingencies
To prepare for unforeseen events and ensure you don’t run out of funds part-way through the project, you should include a contingency budget. Generally, setting aside 10% of your project costs should give you enough leeway in the event you have to change course.
Getting to grips with numbers
Most of the information requested by your lenders will be financial in nature. That’s why it’s important to have a good grasp of your business numbers. There are two critical aspects that lenders tend to focus on.
1. Your repayment capacity
Repayment capacity refers to your ability to meet your financial obligations via the funds generated through your company’s activities. One of the most frequently used terms in banking jargon is EBITDA, which stands for earnings before interest, taxes, depreciation and amortization. EBITDA is used to determine whether your business has the available funds to service its debt. To take out a new loan, your business must generate sufficient earnings to cover all your principal and interest payments.
Estimate future profitability
In some cases, a company’s historical performance may not justify a new loan but its future profitability is expected to increase thanks to the new project. While entrepreneurs often evaluate projected growth based on increased revenue, lenders tend to focus on increased profitability (i.e., earnings). An additional $1 million in sales that doesn’t translate into EBITDA growth won’t increase your chances of being approved for financing.
Some specialized financial partners will base their funding decision solely on your ability to generate earnings, and won’t even take into account any guarantees offered by the company. Understanding how your upcoming project will impact the company’s profitability is crucial.
2. Your working capital needs
The second thing to consider is your company’s working capital. Lenders sometimes require a down payment as a financing condition and companies often draw directly from their cash reserves to make that down payment. To determine the maximum amount you can put toward the down payment, you first need to calculate the minimum working capital needed to run your company’s operations. Using historical cash flow data, you’ll be able to establish a minimum liquidity threshold to sustain your operations. Additional sums—referred to as surplus cash—can be used for the down payment.
Prepare your financial projections
Developing financial projections is important to help you properly assess the direct and indirect benefits of your project, and for determining your working capital needs. Financial projections can initially help your team decide which projects are worth pursuing, and later they can be included with the information package provided to your financial partners.
Evaluating your guarantees
Even if your business performed well historically, it could still face a bad year or be hit with unforeseen circumstances affecting its profitability. Therefore, to minimize their losses, lenders may require tangible guarantees from your business. The type of guarantee you’re able to provide will have a direct impact on your loan interest rate.
Get an accredited appraisal
Available guarantees are an important asset for businesses when applying for a loan. The company’s tangible assets can provide leverage in your financial arrangement. To maximize the available leverage on an asset, you may need to get an accredited appraiser to determine the asset’s market value. In most cases, the market value of an asset is higher than its book value (the figure presented in the company’s financial statements).
Important: When communicating with your lender, ask them to provide you with a list of accredited appraisers that they recognize. Some lenders only accept reports prepared by accredited appraisers.
If a business doesn’t have much collateral to offer, the lender may request a personal guarantee from the shareholder. However, personal guarantees can be a source of worry for entrepreneurs who are concerned with protecting their personal finances. The lender’s main goal in this type of arrangement is to make sure the entrepreneur will do everything they can to sort out any financial problems that affect the business. A personal guarantee provides the lender with extra reassurance that every effort will be made to keep the company afloat and able to service its debt.
By following these steps, you’ll be able to present a well-supported financing application to your financial partners and maximize your chances of success.
Having the backing of an experienced team can go a long way to reassuring your partners. Working with experts can also help you avoid costly errors down the road. Our team of financial advisors has the expertise to assist you with every step involved in your financing application, from initial planning to receiving your funds.
04 May 2021 | Written by :