When you’re starting out in business, finding the funding you need is likely to be high up on your list of considerations. There are now plenty of options you can explore when looking for the right funding for your business. These include a number of relative newcomers such as crowdfunding, peer to peer lending, and government backed Start-Up Loans.
As a delivery partner for the government’s Start-Up Loan scheme, BizBritain receives hundreds of applications from new business owners every month. In this article I’m going to share the key things we look for when assessing applicants and the areas you should focus on. If put into practice, these can greatly increase your chances of being successful in your application.
When you apply for a Start-Up Loan, you’ll need to be able to demonstrate that you have a solid understanding of how a business works. It’s important that you have a grasp of key areas like sales, marketing and finance. We don’t expect you to be an expert, but you need to demonstrate that you have researched the basics before you apply.
As a minimum we would need you to know about things like profit and loss reports, balance sheets, cash flow and how to go about marketing and selling your product or service. You should also understand the technicalities around the type of business and what is appropriate for your situation. For example, whether you would be best served operating as a sole trader, a partnership or a limited company.
This might sound obvious, but it’s amazing how often people don’t actually understand how their business will work when they are challenged about it. I’m not just talking about having a vague idea around what you want to do; I’m talking about understanding the complete process behind how your business is going to make money. You need to have a solid idea of how you are going to sell your product or service to your customers in sufficient volumes and at a low enough cost to make a profit on an ongoing basis. All while covering your own living costs and staying cash-flow positive throughout.
Simply saying that you quite fancy setting up your own barber shop isn’t going to cut it (excuse the pun!). You need to understand every aspect of how you are going to make it viable. For example in the case of a barber, you need to think about a number of things including: How much you’re going to charge per haircut; how many haircuts you can realistically perform each day; how you’re going to find and convert enough people into paying customers in the face of local competition; how much money that volume would equate to in daily sales; the combined cost of all your overheads, the timings around when you are going to have to pay for things and so on.
You might be thinking that the most important part of your loan application is the business plan. However you may be surprised to know that how you stack up as an ‘investable person is just as important. Business plans are easy to change, whereas changing the people behind them is much harder. Any lender will need to be confident that you are reliable and can be trusted to pay back the money before they consider issuing with you a loan.
At BizBritain, when weighing up the ‘person’ aspect of an application, we look to gauge things like your level of experience, your depth of understanding of your business model, how reliable you’ve been at paying back other loans in the past, and a number of other factors.
It doesn’t matter how good your business plan is; if you have a long history of failing to repay your debts or you choose to lie about things on your application, you have little chance of being taken seriously. If you do have adverse items on your credit report, you will always be looked on more favourably by a lender if you are open and honest about it and you can explain how they came to pass. We find out everything about our applicants either way, because we run thorough background checks (including full credit checks) on everyone who applies for a Start-Up Loan.
It’s all well and good knowing what you are planning to do with the funds should you be approved for a loan, however you will need to provide your lender with all the documentation to back it up before they will consider giving you the cash.
Aside from the obvious things like proof of ID and proof of address, you will also need to provide evidence of anything that is material to your application. We regularly receive applications from people who have a well thought out plan of what they intend to do with the funds if approved, but lack any kind of paperwork to back up what they are claiming. For example if you have included the purchase of a specific expensive piece of equipment in your cash-flow forecast, you would need to evidence the price and that you are actually intending to buy it by providing copies of written communications with the supplier.
Don’t be tempted to make up random figures that you can’t back up, as they will only get picked apart during the process.
The largest problem area for most Start-Up Loan applicants is their understanding of how to prepare a cash-flow forecast. It’s the one thing that seems to strike fear in the hearts of the majority of people who apply. But although having to prepare a cash-flow forecast may sound scary, it really isn’t as bad as it sounds. All you are really doing is writing down what you plan to spend each month, how much you plan to sell each month, and then work out the difference between the two totals. It’s really quite simple when you break it down into little chunks.
There are plenty of free resources, examples and online templates that show you how to put together a basic cash-flow forecast, so it’s well worth spending a bit of time getting to grips with preparing them before you apply for a loan. Even if you aren’t actually applying for a loan, understanding your cash-flow is an incredibly important part of running a business, so you would be well served by brushing up on it regardless.
An area of key importance, which is often overlooked, is understanding why you need to borrow the money. At the end of the day, everything you borrow has to be paid back with interest, so it’s sensible to borrow as little as possible.
As part of the application process we check to see that you understand why you need the money and that you are not attempting to borrow more than you require because you lack confidence in your ability to generate sufficient revenue. A loan shouldn’t be seen as a crutch to support poor sales figures; it should be seen as a tool to help you get your business off to a quicker start. If you are trying to borrow extra money to prop up low sales over a sustained period, then you need to re-evaluate your business plan and whether or not a start-up loan is a suitable type of funding for your type of business.