A 3-step insight guide for start ups and scale ups who are considering applying for a business loan.
Cashflow is the lifeblood of any business. Regardless of revenue levels, effective management of cash is necessary to maintain business as a whole as well as to scale operations, and to acquire and retain customers.
An agency business may find cashflow difficult at times for a number of reasons: customers may be slower paying than before or there are seasonal fluctuations in trade levels. However, the reasons may also be due to positive changes in the business: staff may be joining to service a growing demand, new office space is required to house a growing operation and capital may be required for new equipment.
In these scenarios, where the business is struggling to squeeze any more cash out of the day to day and still requires cover, we would recommend assessing whether a debt finance product could be of assistance.
Loan debt can be obtained through many national and international high street and alternative finance banks. Of course, repayment liabilities are normally fairly immediate (within first 45 days after drawdown) and will incur interest in addition to the principal loan repayments, so it’s important to consider this and any other additional costs that you might need to pay (e.g. loan arrangement fee, early repayment fees etc.).
Before progressing with any application, it’s also vitally important to identify that the business already has sufficient existing incoming revenue streams to cover repayments over and above current and future committed outgoings,, as banks will assess affordability of the loan repayments based on your existing financial health.
Step 1: Business Loan Preparation
Check The Business Credit Score & Report
The first place to start would be to determine your current business credit score. This will give you an idea of how likely you are to be able to obtain a business loan with the existing credit history.
Nuvem9 are Capitalise partners and this means we can generate a Company Healthcheck for you summarising your credit rating, and benchmark you to other businesses in your sector, your age and your size. This is incredibly valuable information as it allows you to understand at the outset the relative strengths and weaknesses of your business. We can also leverage our strong relationship with Capitalise to actually implement actions to improve your credit score. If you want to learn more about this, you can get in touch with us here and quote ‘Capitalise’.
Once you have your Credit Report, check for any important information it outlines, in particular any improvements the business can make to increase the credit score. A higher score can help with better rate loans and a higher number of loan provider options to choose from.
Step 2: Determining your needs
Your credit score will determine your ability to loan money for a period of time. The next step is to prepare a detailed cash flow forecast to determine:
- Why is it needed
- How much capital is needed
- How long do you need it for
Why is the loan needed
The need for capital will be one of, or a combination of, the following:
- Current loan facilities are draining cash and there may be a need to refinance to a longer term and/or cheaper facility
- There is a seasonal drop in revenue which has caused cash receipts to drop below outgoings
- Large customers are paying on their terms and after your own suppliers and staff need paid for their work
- You want to bring in extra costs and need help covering them before they generate a return on your investment.
Understanding the reason for needing the loan then leads to identifying the correct product. In the above examples this would be one of a term loan, a short term facility loan, invoice financing facilities and growth loans or asset finance.
How Much Capital is needed and how long do you need it for
A key consideration is to identify exactly what you need. We would suggest plotting our your forward cashflow on a bottom up basis, namely adding in:
- What costs you are committed to and when do they need paid (staff, rent, software subscriptions etc.)
- What new costs do you intend taking on and when
- What are your customer revenues going to me and when will they be received
This will allow you to see your rolling cash balances month to month and from there identify the funding requirement and length of time required. When determining the funding requirement please also ensure that you account for all fees associated with the loan and the timing and level of repayments.
We’d also recommend stress testing your assumptions on a worst case scenario basis e.g. what happens if one customer ceasing trading, revenue doesn’t grow by levels anticipated, costs of services increase etc. This will allow you to see how sensitive your plan is to changes you may not be able to control.
Step 3: Making Your Business Loan Application
Once you have decided to make an application, and identified the product that best suits your needs, the next stage is choosing a lender or broker to make your application to.
Our tips at this stage are:
- Use a broker and advisor – as well as saving considerable time by having you complete one single application pack, the advisor can give you invaluable advice by pre qualifying your application for obvious red flags lenders may pick up on
- Review all offers received in particular:
- What security and guarantees are on offer
- How much does the interest cost you
- Can you make early repayments without penalty to minimise interest costs (very important for short term working capital cover)
- How quickly can the loan be drawdown
- Are there any additional costs in the small print – some lenders can charge a very high arrangement fee which means the money in your bank account is less than planned
- Understand how the product works – a term loan is fairly simple but invoice discounting platform vary in complexity and ease of use. Ask for demos if necessary and satisfy yourself you are comfortable with it; also ensure you understand if third party stakeholders need to consent to you proceeding e.g. your current bank, customers for invoice discounting etc.
Get Your Finances In Order
Different lenders will require different sources of information, but all of them will ask for your current spending and financial status information, such as P&L statements and latest bank statements. Have this information before you apply to make the application process easier, as well as keeping yourself in the know about your financial status.
Make Sure Your Accounts Are Up To Date
A large number of lenders usually run a credit check that will look at your credit history and the Company’s filing history, included the latest required accounts by Companies House. Check that these are filled and up to date before you apply.
Debt finance can be a vitally important tool to enable your agency to scale effectively and affordability. We’d really recommend following the steps above primarily because this will give you the best chance of success in securing a loan but also because the range of lenders and products is so extensive it can be overwhelming.
We work with reputable lenders that, as experts in their field, support you in accessing clear information and insight so you are able to choose the debt financing for your situation.
Here’s a list of the top 5 things to look out for when you are choosing a business loan lender or broker:
- They are registered with the FCA
- A simple and understandable process, ideally with an Account Manager who goes through the whole process alongside you
- Competitive and fair pricing
- Testimonials and reviews from previous customers, ideally rated on a trusted third party reviews website
- Additional fees, such as processing, late or early payment fees or administrative fees
Here’s a list of the likely things you’ll need to have handy when applying:
- Latest company accounts
- Registered company name, address, number and vat number if applicable
- Full name, address and date of birth details of all company beneficiaries with a 25% + company shareholding
- Existing P&L for 2 years
- Expected / projected revenues for the next 3 years
- Any security if applying for a secured loan
- Cash flow analysis and projections which will assess the business’s affordability
Do you need expert advice?
We can say that investment in a startup is vital for its continued sustenance, growth, and expansion. However, the path to attract this investment is not that straightforward, there are many nuances in the process. Taking the help of an established expert in the domain not only assures that you’re on the right path but makes the process seamless and effective for you.
Nuvem9 has years of rich experience in assisting businesses to get equity investments. Nuvem9 will provide you with a Startup Funding Consultant focused on understanding your startup’s requirements and charting your funding journey. Get in touch for a free consultation session and discuss your company’s specific needs. Nuvem9 has raised well in excess of £10m in loans for its portfolio and would welcome a no obligation call with you to discuss your needs and possible solutions we could help you secure. Here’s where you can book an appointment to speak to us.
Image Credit: Photo by Tyler Franta