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The five important Cs when approaching a bank or debt provider for business funding

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At some point in the life of a business, most owners will need to look externally for funding. This may include help with startup costs, supporting business growth or in due course a business exit strategy. 

Boost Access to Finance business adviser Iain Duncan, a corporate and commercial finance specialist, offers his five top tips to help business owners understand what debt providers are looking for when considering whether to support them for funding. 

Iain’s article below comes with the backdrop of lending to SMEs by British banks rising 12.8 per cent in 2022 (the latest period on which statistics are available) to £65.1b – this is the second highest year on record in nominal terms. 

According to the report Small Business Finance Markets 2022/23 published by the British Business Bank, UK SME lending balances in 2022 stood at £197b with private equity investments also growing by 10 per cent to £14.8b in 2021. 

Focussing on the Five Cs 

Businesses looking to approach a bank for funding should focus on what I like to call the Five Cs, which namely are: Character, Capital, Capacity, Conditions and Collateral.

1.      Character – backing the people behind the business

While banks may provide loans to companies, at the end of the day, the bank manager is backing the people behind the company – In my opinion Character is therefore the most important and heavily weighted of the five Cs. 

Clearly banks and debt providers ultimately offer commercial lending to limited companies, however, it is the owners and principal controllers that they are backing and relying on. Lending managers want to know that the people running the business are honest and have integrity and possess the skills, competence and attitude, to be successful in business. 

They also seek to ensure that prospective borrowers can honour, if things go bad, the company’s and their own commitments to the bank.

So, it is important that lending applicants can positively evidence to the bank/funder the following points:

  • A good track record, of not only financial success, (this may be evidenced by historic year end accounts) but also with its customers, suppliers, stakeholders.
  • Views and opinions in the market, in which it operates, from competitors, of the business and its owners.
  • The existing or past relationship with the company’s bank/lender and whether commitments have been kept, for example, covenants complied with, loan re-payments made.
  • General credit history of the business and its owners/principal controllers – the latter should not be underestimated – if the owner has for example defaulted on a personal loan recently or has financial difficulties, then this will taint the opinion of the business lending manager when reviewing an application for funding. 
  • Banks will want to see that the company pays within terms to its suppliers, that there are no county court judgments (CCJs) or defaults registered (to both company and individuals) and the relationship with HMRC is good.
  • The culture of the business, what it stands for, how success is measured, how the staff feel about working for the business (for example: reviews on job websites).

Providing CVs for the owner and the principal controllers is a great way of evidencing the skills, attributes and experience of the key people involved in the business to your banker.

If I was to sum up what an A+ business lending applicant would be, it is effectively Sir Richard Branson, married to Mother Teresa with a joint bank account – in essence a borrower with both the proven ability to repay as well as the morals to actually do so!

2.     Capital or stake – the owner’s commitment to their business 

Capital is the amount of money, whether by formal share capital or shareholders loans, that business owners have invested into their venture. Banks want to see some ‘skin in the game’ or commitment from business owners – after all, if a founder is not willing to back her/his business in cold hard cash, why should a bank? 

Funding providers will want to see the owner’s commitment to their business – again a key consideration for lending managers and vital to be evidenced by funding applicants.

3.      Capacity – the business’s ability to repay a loan

Lenders will want to assess the business’s ability to repay a loan based upon historic, current and future cash flows, this is its Capacity or also known as Cash Flow. 

Owners should ensure that they have robust business plans, including detailed explanations of historic trading and cash flows and the assumptions behind forecasts (be prepared to provide a minimum of two years’ forecasts) – the more certain that future revenue streams are perceived to be, the better.

4.      Conditions – the state of the business

Conditions covers the state of the business, the industry it operates within and the broader macroeconomic outlook and how these factors might affect the company’s ability to repay a bank facility. While individual business owners cannot control the overall economy, they can plan ahead. 

Although it might sound counter intuitive, it often makes sense to apply for working capital funding when the business is strong and may not have an immediate or short-term need. Banks will often be more amenable to providing funding when it is not needed – so if conditions worsen, funding lines may be cut, but at least there will be some cushion. 

As a finance director of a strong, well-capitalised North West business said to me recently when referring to his overdraft request: “it’s like having a warm blanket available to you for a cold day.”

5.      Collateral and security

Collateral or security as it is often known, are assets (whether the businesses or third parties) used to guarantee or support a bank facility. The more traditional security will be property, but value can also be attributed to other assets in a business for example: non-perishable stock, good quality trade debtors. 

Applicants will need to evidence when approaching a bank that there are potential secondary sources of re-payment for the funds being requested (the first source of re-payment being the cash flow generated from the businesses trading). 

Collateral is the last of the five Cs and while security doesn’t make a ‘bad’ proposition ‘good’ it certainly helps the lending manager to cement a positive decision as well as potentially having a positive influence over the price (interest rate/fees) of the funding.

About the author Iain Duncan, Access to Finance LancashireIain Duncan has a wealth of experience built up over nearly 37 years in a highly successful career in banking, as a corporate and commercial finance specialist, working with primarily North West SME’s supporting founders with their financing needs and requirements.

The Access to Finance service is for ambitious businesses with desire to grow, invest, create jobs and / or innovate and trade internationally. Whether you are looking to secure investment, seeking a loan or planning an acquisition, our team can help.

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