Bank loans are still one of the most common ways for small businesses to access finance. But getting a loan is not as easy as it was even just a few years ago. Time will tell whether the Coalition government will be able to boost banks' lending to smaller firms, but in the meantime it's important to know as much as possible about whether a bank loan is right for you, and how to increase your chances of being given one.
Pros and cons
The real question though is whether a bank loan is the right way to raise money to grow your business. On the plus side you won’t have to surrender any equity. It’s a pretty straightforward process too. The primary concern of banks is whether you can afford to meet your repayments. If you can convince them that you will, the chances are they’ll say yes.
There are downsides too. Repaying a bank loan places a drain on cash and if you fail to meet a payment there can be consequences. And remember, interest rates go up and down, so you need to factor that into your repayment calculations. Equally important, you might not always be able to borrow what you need.
How much can you borrow?
So how much are lenders prepared to stump up? There’s no pat answer to this. Banks work on a case by case basis. If you’re borrowing a large sum, they’ll take a view on how much you can afford to repay and they will also set interest rates according to the perceived risk. However, beyond multiples of around 2% of cashflow you’re probably going to have to negotiate pretty hard and accept the fact that the bank will take a much closer look at the workings of your business. Bank loan rates are negotiated case by case, depending on risk and the sum borrowed.
Business bank loan agreements are drawn up on case-by-case agreement and the terms are, to some extent negotiable. It’s not just a question of the term, the monthly repayments and the interest rates. You will also have to agree fees and whether or not there will be a penalty for settling early. The covenants attached will define your responsibilities as a borrower and these should be looked at carefully. You may get a better deal if you offer business or personal assets such as security. A secured bank loan reduces the lender’s risk.
What to do next
Shop around for your bank loan; look beyond your own lender. Some banks specialise in certain areas. For instance, the Bank of Scotland tends to focus on loans of £100,000 plus and companies with turnover £1m or above. By spending time researching the market you can secure the best deal. A sound business plan will, unsurprisingly, give you a better chance of being approved a loan. Take a look at GB's guides to putting together a business plan. If you know your business back to front, are clear about why you need the loan, are confident and have invested your own money in your business, your chances of success are greatly increased.