When you decide you need finance, a quick approval is what you want. Submitting a well prepared application will help you get the 'yes' you are looking for in the shortest possible timescale.
Loan applications nowadays tend to be online and completed in stages.
You will first be asked for some basic information about you, your business and the amount of money you want to borrow. This will be used to log your application and for the lender to do some basic credit checks.
More often than not, it will then lead to a request for more information. This is the point at which more detailed scrutiny of why you want the money, your repayment proposals, the security, and your ability to meet the repayments will take place.
Time spent collating all of the information that you will need in advance so it is readily to hand when you need it will pay dividends later as you progress through the process.
Let’s have a look at these requirements in more detail.
While it might seem fairly easy to complete the initial application, care is required. Most lenders will be employing some degree of auto-underwriting. If you are declined at this stage, it can be very difficult to get the initial decision over-turned and your application looked at in more detail.
In the first instance, make sure you understand the lender's criteria. For example, if the lender says it will lend a maximum of 70% of the security value or won't lend for a particular type of asset purchase, there is little point in applying for anything in opposition to this. Secondly, if any of the applicants have a chequered credit history, seek advice on how to present it. Submitting an application online might not be the best course of action in this scenario.
A quick word on the amount. For anything other than a working capital facility, you will be expected to make a contribution, so be cautious about applying for 100% of the cost. Be honest with the amount you need. Applying for more in the hope that the lender might agree a bit less, and hence what you really need, is a flawed strategy. So too is applying for too little in fear of being declined for what you need. Most lenders will be able to work out that you won't have enough and will decline you.
If the decision is 'cut and dry', you might even get an instant credit decision at this stage, be that a yes or a no.
Let us assume, though, that your application passes initial checks and now moves into more detailed underwriting. This is when the requests for information will come thick and fast.
Again, let's explore why the lender is asking for this information.
Naturally, your lender will want to know how you plan to pay back the loan. Normally, this will be through cash flow or the sale or refinancing of an asset. To assess the viability of your proposals, a cash flow forecast and profit projection will be asked for in the majority of cases. These forecasts can be tricky to prepare if you have never done them before, so think now about how you are going to get them done. You might need your accountant or bookkeeper to help. Alternatively, there are apps available that will create the forecasts for you when you plug them into your accounting software.
Unless you are approaching your main bank, the lender will lack any means of verifying the claims in your forecast or how you run your financial affairs at present. For this reason, they are likely to ask for sight of bank statements. As technology improves, it is increasingly possible to authorise the lender to draw the data it needs directly from your bank account, saving you the trouble of endless scanning or photocopying. The same is true of the data in your accounting system if you use one of the main cloud based providers like Xero, Quickbooks or FreeAgent.
A lot of questions, too, will be asked about the security being offered.
A directors' guarantee is standard for anything other than a loan taken under the Recovery Loan Scheme. (Read our separate blogs about the Recovery Loan Scheme and understanding directors' guarantees). For a small loan, the lender might be satisfied with the guarantee on its own, but for anything larger - typically over £50,000 - it is also likely to look for some supporting security, invariably a second charge over your property.
Of course, it is the valuation that will be front of mind for the lender, so you will be asked for evidence of its value now along with its estimated value after any development or improvements have been completed (often referred to as the gross development value). You will also be asked for details of any other loans secured on the property.
The whole process can feel quite invasive at times, and to be quite honest, it is. The lender doesn't want to be faced with managing a distress situation so will do whatever it can to minimise the risk of one occurring. You don't want to be in a distress situation either, so all the questioning might be argued as being in your interests too, albeit it can be hard to see it that way when it is happening!
We hope this post will prepare you for submitting a successful loan application when the time comes. Every lender has its own criteria for finance and it can often help to talk with somebody who understands the market before deciding who to apply to.
If you’d like to understand more, speak to one of our regulated advisers. They will be pleased to help.
By: Neil Edwards<< Back to latest blogs