need to secure a loan to expand my business, but in this environment are banks still willing to lend?
A.Yes, according to Stephen Alambritis, chief spokesman for the Federation of Small Businesses (FSB): “Access to finance was a major problem last year, but the availability of money set aside specifically for small businesses is now much better.” According to a survey by the Department for Business, Innovation and Skills, small businesses with an annual turnover of £1m have a 66 per cent bank loan approval rating, this rises to 90 per cent for businesses with a turnover of between £1m and £25m.
However, although banks are ready to lend money, the hurdles are much greater, says Alambritis, and fees and interest rates can be much higher. The FSB recommends that entrepreneurs should arm themselves with a watertight business plan when they talk to a bank manager about a possible loan. A business plan should include cash flow forecasts for the next three to five years and at least three years’ worth of financial accounts data. It also helps to show that you have a programme of cost cutting. This could include re-negotiating lease agreements for any property you rent or bringing on board family members to cut labour costs.
Alambritis says that the best way to placate a bank manager is to match the amount of funds that you are looking to borrow from the bank with your own money. “The more of your own money you can put in, the more likely you are to get the loan as it shows that you are truly committed to the business.”
Q. I have been accepted for a loan but the fees and interest rates are too high, what should I do?
A.You should negotiate with your bank manager to lower the fees, says Alambritis. This is easier to do if you have put up a large percentage of the funds, since loans to businesses work in a similar way as mortgages: the bigger your deposit the lower the interest rate you will pay on the mortgage. If you post collateral with your loan or are willing to guarantee it, then this could also help you to negotiate a lower interest rate. You could talk to your bank about an Enterprise Finance Guarantee – a £1.3bn loan facility that was put in place by the government to help small businesses avoid the teeth of the recession. If you are approved for the scheme then the government will guarantee 75 per cent of the loan; and, according to the FSB, so far 8,000 businesses have been granted loans of almost £800m.
Q. What should I do if I get refused a bank loan?
A.There are ways other than banks for a small business to secure finance. Alambritis says that if one of the company’s directors are foreign or there is a foreign element to the business then it might be worth trying one of the many overseas banks based in London.
If you are willing to sacrifice some of the control of your business than a mentor or an angel investor might be a good option, especially if you have an interesting or innovative product.