What makes a business attractive to lenders?

What funders look for and how to give your application the best chance

One of the questions I get asked quite a lot is what lenders really want to see when a business applies for funding. There isn’t one neat answer. Turnover, profit, credit history and the balance sheet all count but lenders will also want to know how the business is trading now, why it needs the money and whether the plan behind the request makes sense.

We see this first-hand at Evolve. Two businesses that look quite alike on paper can get very different replies from lenders. Much of that comes down to the detail behind the numbers, how the deal is put together and whether it has gone to a lender with an appetite for that type of business.

What does a lender look at beyond the headline numbers?

A lender wants to understand the business behind the accounts. That means looking at how long it has traded, who runs it, how it makes money, its customer base, current debt and what the new funding will be used for.

The reason for borrowing matters too. A request for £500,000 to buy kit that will help a firm fulfil a new contract tells a very different story from a request for £500,000 with no clear plan for how the cash will be used.

Good lenders will want to understand that story and a good broker should make sure they have the facts they need from the start.

How important are up-to-date figures?

Very. Filed accounts are useful but they can be months old by the time a lender sees them. If a business has grown fast, won a large contract or had a difficult few months, last year’s accounts may bear little relation to where it is today.

Up-to-date management accounts, bank statements and forecasts help fill that gap. Open Banking is also giving some lenders access to current trading data, with the client’s consent, so they can see cash coming in and going out rather than relying on old figures.

I’ve worked on several deals recently where this current view of the business has played a big part in the credit review.

What does cash flow tell a lender?

Quite a lot. Profit on paper doesn’t always mean there is cash in the bank. A growing firm can have healthy sales and still face a cash gap if customers take 60 days to pay and staff or suppliers need paying much sooner.

Lenders will look at how cash moves through the business, whether payments are being met and how much room there is to service new debt. If there are peaks and troughs, being able to explain why they occur helps.

This can also point towards the type of funding that may work best. Invoice finance, asset-based lending, trade finance or a working capital facility may suit the business better than a standard loan.

How much does the management team matter?

Lenders are backing the people running the business as well as the numbers. They want to know that the management team understands its figures, has a sound plan and can explain what it wants to do with the funding. If something has gone wrong in the past, being open about it and showing what has changed can help too.

We spend a lot of time getting to know clients before we take a deal to market for this reason. It means we can explain the business well when we speak to lenders rather than send over a set of accounts and wait to see what comes back.

Can a business still get funding after a difficult trading period?

Yes. A poor year or a problem in the past doesn’t always stop a business raising finance.

Lenders will want to know what happened, what has changed and what trading looks like now. We’ve worked with firms that no longer fitted their bank’s credit rules or had been through a hard spell but still had a good business underneath.

The lender you approach becomes very important here. Some will rule out certain cases at the start. Others will spend more time looking at the current trading position and the plan for the business.

What can put lenders off?

Missing or out-of-date figures can cause problems as can unexplained debt, poor account conduct and a funding request that doesn’t seem to match the needs of the business.

Another issue we see is firms approaching several lenders without much thought about which ones are likely to fund the deal. Every lender has its own credit rules, sector preferences and deal sizes. Sending the same request across the market can waste time and may make the funding process harder than it needs to be.

Knowing the lender market matters here. We saw that recently with a large recruitment deal where there was only one lender we felt could provide the funding the client needed. Knowing that from the start meant we could focus on getting the deal right with that lender.

What can a business do before applying?

Get the basics ready. Recent management accounts, filed accounts, bank statements, forecasts and details of current borrowing give us a good place to start. It also helps to be clear about how much you need, what the money will fund and what you want the funding to achieve.

From there, we can work out which type of finance may suit the business and which lenders are worth speaking to.

Why does choosing the right lender matter so much?

There are a lot of lenders in the UK commercial finance market and they don’t all want the same deals. One may have a real appetite for manufacturing, another for recruitment and another for firms buying assets or trading overseas.

We spend a lot of our time keeping up with what lenders want to fund, where their credit rules sit and which types of deal they are keen to see. That knowledge can save a client a great deal of time.

It also means we can look beyond the immediate deal. A client may need a specialist lender today, then move back to bank funding once the business reaches a different point. We’ve helped several clients do just that.

Getting funding agreed often starts well before an application reaches a lender. A well-prepared case, current figures and the right lender can make the process far smoother.

If you’re thinking about funding, we’re always happy to look at where your business stands now and what options may be open to you.  Please contact me via stef@evolvebusinessfinance.co.uk.  We’d be happy to help you get everything in place before the autumn rush.