Here’s some insight into what financiers look for in a finance application. This will help you prepare a better submission and set your business up for success.
In the previous blog, we touched on how you must know what kind of finance you’re looking for which will also guide you to approach the right kind of financier. In the same way, depending on the type of finance you’re looking for, the requirements may differ. Do your research to make sure you know the specific requirements.
In this blog, we’ll touch on the basics that cut across most finance applications. Depending on the type of loan, the importance given to each requirement may differ.
Compliance
This cannot be stressed enough! No financier will give your business credit if you have not been managing your business well. Part of that management involves ensuring that your tax affairs are in order, you pay your suppliers on time and that your business is keeping up with all the regulations it is required to.
There are many ways in which a financier can check your business compliance namely, SARS, Central Supplier Database, CIPC, and Transunion
Capacity
The financier looks the business owner and how able he/she is to repay the loan in their own capacity. They look for stability and recoverability from the owner.
Some financiers consider the owner’s qualifications and professional experience when deciding if they want to lend to the business. The manner in which you manage your personal finances is a good measure of how you are managing your business finances.
Behaviour
Financiers look for how well the business manages its existing credit. It is important to build credit history for your business. Inasmuch as they consider the owner’s creditworthiness, having a good credit record in the business’s name is critical.
Some financiers go to extra lengths to contact major creditors of the business and discuss payment behaviour as well as the general relationship between them and the business.
Security
Depending on the finance required, the financier may need to consider securing their loan against a fixed asset. Secured loans are for a longer period and a larger amount of finance. If the business does not own any fixed property, the financiers may consider using the business owner’s property as security.
Should the business default on loan repayments, the final recourse for the financier is usually to take possession of the security, sell it and recover the money borrowed.
Having some skin in the game
Financiers are more likely to consider granting finance when the owner has put their own money into the business (owner’s capital). This amount is usually found in the equity section of the statement of financial position.
When the owner borrow’s money to the business from their own funds, it is reduced by the amount of the owner draws from the business, so it’s advisable to maintain a healthy balance between borrowing money to the business and withdrawing from it.
Future outlook
Inasmuch as looking at past performance is important to financiers, they are forward-looking. If you can provide them with a fair presentation of the future outlook of your business by giving consideration to the current environment it is operating in, your chances of success are higher. If you have or are in the process of securing contracts with customers, highlighting that is key.
We will be covering all about business credit scores in the next blog. Stay tuned!
Content credit – Capital One
