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Five ways for SMEs to prepare for a funding application

POSTED: 4th June 2015
IN: Guides
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What should small businesses consider in order to improve their chances of achieving funding from lenders?

undefinedBritish businesses report a positive outlook in 2015, with 46 per cent of SMEs intending to grow their turnover and the Office for Budgetary Responsibility predicting business investment will grow by 6.7 per cent over the next four years.

Despite this optimism, small businesses still perceive access to funding as a major challenge, with 26 per cent suggesting finance was very difficult to obtain in 2014 and the number seeking external funds dropping from 18 per cent in 2012 to just 12 per cent in 2014.

However, experts point to a gap between perception and reality in terms of approval rates for funding, with the British Business Bank estimating that up to 160,000 SMEs could be discouraged from applying for finance due to underestimating their chance of success.

In order to support these eligible businesses in their search for growth capital, Aldermore explores five key factors SMEs should consider when preparing for a funding application.

Pay attention to paperwork

It’s natural for entrepreneurs to get caught up in the passion they hold for their business, but without a thorough overview of the numbers, it can be difficult to convey what makes the venture such a good idea to third parties.

A well-researched business plan should include accurate projections for future sales, turnover and profits to demonstrate why the company represents a sound investment, building in a comfortable margin to show how the business will cope if it underperforms on these targets. Evidence of agreements with key suppliers and clients, an overview of assets held by the firm and copies of relevant licenses also provide reassurance for lenders that the business plan is robust.

Beyond profitability, it’s important to provide a cash-flow forecast to prove liquidity has also been considered, since even successful businesses can run into problems if cash reserves become depleted in the short-term. Meanwhile, for established businesses, previous tax returns and accounts data can be used to demonstrate a proven track record of managing finances effectively.

Look beyond the high street

“Businesses instinctively turn to where they bank for finance in the first instance,” comments John Allan, National Chairman of the Federation of Small Businesses (FSB), in line with findings from the Bank of England that the six largest banks in the UK account for 70 per cent of lending to businesses.

“Around 35 per cent of SMEs are refused loans by the ‘big four’ and many do not apply again,” adds Allan, suggesting that restricting their search to mainstream lenders could be holding small firms back from gaining funding. Thankfully, the FSB leader suggests the situation may be changing as businesses become aware of more specialist lenders, stating:

“Though still relatively small in market terms, these providers are therefore beginning to chip away at the large banks’ dominance and doing away with the ‘one size fits all’ approach.”

Understand the alternatives

Estimates suggest the alternative finance market grew by 161 per cent in 2014, with 50 per cent of SMEs agreeing that new forms of lending are changing the face of SME finance, opening up new opportunities and democratising access to funding. Despite these findings, 42 per cent of smaller companies are still unaware of the full range of options open to them, including invoice and asset finance.

“Not every business suits a standard high-street loan,” reflects Allan. “If businesses were aware of their options then it might help them to seek alternative lenders or products that would better suit their needs, and make it easier for them to access appropriate finance that will help them fulfil their growth ambitions.”

Review credit history

Entrepreneurs applying for finance for the first time may not be aware that their personal credit history may also be taken into account by lenders, particularly with 17 per cent of small businesses using their personal account for business banking.

In fact, Professor Russell Griggs, an independent external reviewer of appeals from businesses that have had applications rejected by banks,  reports that 52 per cent of businesses seeking under £25,000 in funding are rejected because of a poor credit score, often based on their personal rather than business profile.

Building up a positive personal credit profile through simple actions such as ensuring bills are paid on time will demonstrate a responsible approach to budget-keeping that reflects well on the individual’s reliability as a business leader.

Get a second opinion

Entrepreneurs often have to fulfil many roles at once and may not have the time to develop expertise in every area of running a business, but fewer than one in three SMEs say they are most likely to approach a professional advisor to discuss raising finance.

Though there is a cost to consider, financial advisors can utilise their in-depth knowledge of the market to provide tailored advice on the most appropriate forms of funding for each business and how different lenders make credit decisions. The government’s Business Advice Scheme, in association with the Institute of Chartered Accountants in England and Wales, offers a searchable database of qualified advisors, filtered by location and specialty, to help SMEs access quality advice.

 

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  • Finance
  • Business
  • SME
  • Guide

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