SMEs: How to Improve Your Chances of Getting a Business Loan?

Financial institutions are your partners in making your organization thrive. When business is good for you, it’s also good for them. They are therefore always seeking new clients. Nevertheless, to grant you a business loan, they must minimize their risk by making sure that both your project and your enterprise will make a profit and that you will be able to repay them.

1. Make sure that your financial projections are up-to-date

• Check that your financial statements are up-to-date.
• Prepare or have someone prepare financial statements forecasting the impact the new financing would have on the enterprise’s financial position.

2. Prepare a complete file

• Prepare a complete file that includes your financial statements, a list of assets, details about your project, investment statements, financial projections and a business plan.
• Familiarize yourself with all these documents and be ready to answer any questions you may be asked. For example, have a clear understanding of why you are requesting a loan and the amount your company needs.

3. Check that you are respecting the usual ratios

Ratios are used to evaluate a company’s performance. They also help compare it to similar companies in the same industry to ascertain whether it stands above or below the average.

There are four main types of financial ratios:

• Liquidity ratios.
• Efficiency ratios.
• Profitability ratios.
• Financial leverage ratios.

The financial institution will especially analyze the ratios related to the balance sheet, which compare the company’s assets in relation to its liabilities. That will provide a clearer picture of the long-term solvency of your organization. Finally, the institution will evaluate whether your company has the necessary borrowing capacity.

4. Contribute a downpayment

The larger your downpayment, the more you will save on the loan’s interest expense. Furthermore, that amount will give the financial institution confidence about your ability to manage your finances effectively. It will also decrease the risk it takes by granting you a business loan.

5. Exercise caution when giving a manager’s guarantee

It is common to see the manager personally guaranteeing the company’s debt in order to secure a financing agreement, whether it is a loan or a line of credit.

Note that, by doing so, managers are exposed to personal liability in the event the company goes through bankruptcy, liquidation or dissolution. In other words, it means that you may be held responsible for repaying some of the company’s debts and liabilities, should such an event occur.

To learn more, please read our article on the main risks that SME managers should consider.

6. Avoid excessive backlogs in paying amounts owed to the government

If your organization has substantial backlogs in paying income or other taxes, you risk losing credibility with financial institutions, as well as paying interest and hefty penalties. If you have accumulated tax debt, please follow the advice provided here to quickly get back on track.

• Try to pay all your taxes on time.
• Do the same with the amounts owed to your suppliers: set up automated payments to ensure that you are paying invoices on time. Frequent delays can impact your credit score.

7. Compare!

Financial institutions offer a range of loans. Making the right choice is not only determined by interest rates. Having more flexible terms can also contribute to a successful project. Shop around and compare different banks before applying for a loan.

Finally, if your business has accumulated debt and you are having difficulty repaying it, you may need professional help to turn things around. We are here for you. Please don’t delay and get in touch with one of our licensed insolvency trustees, who can assist you in finding solutions.