A guide to securing small business funding from a bank
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Posted: Wed 2nd Aug 2023
Most businesses, when looking to raise finance, will start with their bank. In this article, we consider what types of finance banks and their associated businesses can offer.
Bank finance
If you're looking for finance from a bank, you'll be seeking either an overdraft or a loan. In this case, it's advisable to start with the bank that provides your business account. We explain why when discussing risk profiles (credit scores) below.
Overdrafts
The lender offers you an overdraft with a limit, an agreed interest rate and probably some form of security against it.
You can dip in and out of the facility, up to the agreed limit.
You repay your overdraft when the bank demands.
Overdrafts are usually for short-term finance.
Loans
You borrow an amount over a specific period and repay in instalments on set dates.
You're charged interest at either a fixed or variable rate.
The loan is normally secured against an asset (or assets), which you forfeit if you fail to repay the money you've borrowed.
A loan often has conditions (known as covenants) attached. If you don't meet these, you'll usually have to pay back the money immediately.
Banks or associated companies will also offer other forms of finance, such as invoice factoring and discounting. This is where they lend you money secured against your sales invoices. Some banks also offer hire purchase, leasing and mortgages whereby an asset is used as security.
Why your risk profile matters
Before approaching a bank for finance, you should consider your risk profile (or credit score). Banks use a variety of information to assess risk, such as:
how you run your accounts
whether you've repaid previous borrowing
whether there's evidence that your business could face a drop in its turnover
They will consult credit reference agencies to check your credit score.
If your business is a limited company, finance providers will look at the directors' credit history.
Business plans and financial forecasts
A business plan doesn't just give you a tool to manage the business. It also tells a finance provider what your business's future could look like.
The plan will need to explain:
how much you want to borrow,
the repayment period
how you'll use the finance
how you'll repay it
The financial forecasts should include a profit and loss account, a cash-flow forecast and balance sheet forecasts for the next three years (five if raising equity finance)
Financial forecasts can give finance providers the confidence that you're in control of your finances
If a bank refuses you credit
You're entitled to a written explanation as to the bank's reasons. Consider requesting an appeal – 30% to 40% of appeals result in the decision being overturned, frequently because the business has provided additional information.
All major UK banks have agreed a set of principles for what happens when a formal application for finance is refused and you appeal the decision. An independent and external team of reviewers monitor the principles and how the bank has applied them.
The appeal is reviewed by a second person from the bank who wasn't involved in the original decision – a "second pair of eyes". They may ask you for additional information that wasn't in your original application. The reviewers have 30 days to communicate the result of your appeal to you.
Referral scheme for businesses refused bank finance
Under the Small Business, Enterprise and Employment Act, if one of the main banks refuses you finance, it must, by law, refer you to a government-approved designated platform.
The funding platforms included in this referral process are:
If a bank declines your lending application, it will ask you for consent to refer you to the designated platforms. You can agree to the bank referring you to one or more platforms.
Alternatively, you can refuse the referral. In this case, the bank will give you details of all the platforms so you can contact them directly at a later date.
The bank will pass a set amount of information to the platforms, including your business's name and contact details and the amount and type of finance you've requested. This information may not be enough for the platform to offer you finance, so it may contact you for additional information.
Each platform will have access to providers of business loans, overdrafts, credit cards, asset finance and invoice finance. The scheme does not include equity finance providers.
Looking for finance for your business?
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