During my interactions with bankers, one thing that repeatedly finds a mention is that even if a bank wants to lend, small businesses often make it very difficult for themselves to raise money. In fact, my interactions with many small businesses show that a lot of work needs to be done to convince a bank to lend. Many borrowers fail to recognize the fact that they need to make their business look good and a banker confident is extending the money.
The process is not tough, and if followed diligently, can be the difference between your loan getting approved or disapproved.
Maintain proper accounts – This is the most basic requirement in order to secure a loan. Books of accounts are a snapshot of the health of a business and the most important requirement when seeking a loan. From profit and loss accounts to your balance sheet, a bank would want to go through your accounts to figure out the financial health of the company.
Audit your accounts – Merely maintaining your accounts would not be enough. A bank needs to have confidence in your company business and this can only happen when an independent auditor sins off on your accounts. By law, irrespective of your size or turnover, every company is required to carry out an audit, but for a sole proprietorship firm it is not mandatory. However, it makes sense to audit your accounts if you are seeking a bank loan so that it becomes clear that it shows a true and fair view of financial transactions of the business.
Cash flow – Cash flow is a very important measure of the company as it shows the net amount of cash being generated by a business to meet its operating expenses and take care of its debt. A bank generally wants to see the cash flow statement so if you are looking for a loan, you should prepare one. A positive cash flow would indicate the firm’s ability to meet its expenses, pay its debt on time and also meet any contingency.
GST- With the introduction of the Goods and Services Tax (GST) in 2017, banks have found another way to get a view of a business’s financial dealings. Since GST is so intricately linked to the functioning of businesses, is done electronically and reflects the current position of the firm, there is a great deal authenticity of numbers stated. Banks are increasingly looking at GST as a measure of a business and in fact Government schemes also use the indirect tax to provide interest subvention. For businesses it would be good to have your GST filings in order, and show banks that the business is sound.
Show profits- The proof of the pudding is in the eating. Similarly, the worth of a business at the end of the day is in its ability to make a profit. Before taking a loan, strive to show three years of profits in your annual returns. This validates your business model and is the best reflection of the efficiency of a firm.
Good business plan – It I important to tell the bank about the intended use of the money. A good business plan is a very important part of the application that should state how you will utilize the funds. Banks would want to know where their money would be invested and what the potential economic benefit is. A good business plan should have every aspect of your existing business, why you need the loan, the execution strategy and the financial details. You can find more information in this article .
Leadership and team – Especially in the case of small businesses, a lot rides on the leadership team or the entrepreneur. It is very important to show the domain knowledge and business acumen of the entrepreneur. A large part of a bank’s lending decision is as much a bet on the entrepreneur pulling it off, as compared to the business itself.
Independence of board/mentors – Banks also find comfort if there is a level of corporate governance in place. If you are a company, it is always important to follow the statutory rules as laid down by the law. Very often small businesses do not have structures in place, which in turn raises corporate governance doubts for banks. Having a board and in it some independent directors go a long way in showing the credibility and standard of the company. Having a well-known name as a mentor also brings a level of acceptability for a company and helps in establishing integrity.[“source=economictimes”]