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Would You Lend Your Business Money? 3 Crucial Questions Businesses Must Ask Before Applying for a Loan

February 8, 2024

Danielle Wallis
Marketing Manager

In the UK, the business financing scene is witnessing a marked transformation. The year 2022 saw UK SMEs secure bank loans totalling a noteworthy £65.1 billion, a 12.8% rise from the previous year, indicating an escalated reliance on external financial sources. A significant 36% of these SMEs have been leaning on such financing, typically borrowing over £25,000.


Contrasting this growing need for loans, there's a discernible dip in the approval rates; just 64% of SMEs managed to obtain the full financing they sought in 2022, down from the previous rate of over 80%. This scenario highlights the increasingly stringent and challenging nature of the loan approval process in the UK's economic environment, presenting tougher hurdles for businesses in pursuit of financial backing.

If you are looking to secure a business loan, the following question is essential for you to consider: "If you were a bank, would you lend yourself money?" This question is not merely rhetorical but serves as a critical self-assessment tool. To begin this process of self-assessment, however, you must first understand how to examine your business’s financial standing and loan eligibility in the eyes of the bank.

Setting off on the right foot is crucial for any business producing their loan application. A robust application not only increases the chances of loan acceptance, but also positively impacts your loan terms and interest rates. And with the BoE’s base rate reaching a high of 5.25%, this is more crucial now than ever.

This guide will go through three key questions to consider before submitting your loan application:

1. Do I Have a Strong Financial Model with Data-Backed Financial Forecasts?  

Whilst evaluating business loan applications, lenders undertake a comprehensive review that encompasses various critical aspects. Foremost is the financial position and performance of the business, with a detailed look at cash flow, income statements, and balance sheets.  

For small businesses, your financial model must be backed by effective financial forecasting. This process, which entails a forward-looking analysis of potential income, expenses, and broader financial trends, is not merely a fiscal exercise, but a pivotal strategic tool.  

Importantly, a data-backed and robust financial forecast does more than just guide internal decision-making; it plays a critical role in bolstering lender confidence. By presenting a clear and quantifiable vision of future growth and profitability, such forecasts signal to lenders a business's viability and potential for success. In essence, strong financial forecasting is both a reflection of a business's current health, and a testament to its future potential and sustainability.

However, we recognise it is not easy to create the ideal financial model for your business. With a multitude of factors to consider, it can be very challenging. It’s not surprising therefore, that many businesses fall at this hurdle. Arming yourself with the right tools, support and information are your best ally’s to present a convincing financial proposition.

2. Do I Understand my Business’s Financial Risk?

The Bank of England's recent observations have noted a discernible uptick in default rates among small businesses, contrasting with the stability seen in other lending categories. This trend leads to a more meticulous assessment of the Probability of Default (PD) by lenders, a crucial metric in evaluating credit risk. A heightened PD indicates an increased likelihood of a business failing to fulfil its loan commitments.

Concurrently, the transparency of a business's credit risk profile is paramount. This profile, reflecting past financial conduct and current credit standing, is vital in a lender's risk evaluation. Lenders use this information to appraise risk levels and shape loan terms. The role of credit risk assessment tools in providing predictive insights into borrower default rates is invaluable, aiding lenders in making informed and equitable decisions. This emphasis on detailed financial scrutiny necessitates a strategic approach to financial planning, highlighting the need for businesses to enhance their financial resilience amidst changing market dynamics.

3. Is Your Business Credit Score Sufficient?  

And last, but certainly not least, a strong business credit score is critical for loan approval. This score is a pivotal determinant not just in the likelihood of securing a loan, but also in shaping the terms of the loan, including the interest rates. A lesser credit score could potentially escalate the cost of a loan or, in more severe cases, result in outright rejection. On the other hand, a strong credit score paves the way for more advantageous loan terms.

In essence, the health of your business credit score is a critical factor in navigating the financial landscape, influencing not just the ability to secure funding but also the terms under which this funding is provided. This underscores the necessity for businesses to maintain and enhance their credit scores as a strategic priority.

In summary, the three questions above have hopefully enabled you to reflect on your business’s creditworthiness and encouraged you to pick up on any gaps that might need work. In today’s financial climate, the importance of a strong financial model, understanding financial risk and maintaining a healthy business credit score is highly important to lenders, and will require time and investment from your business.  

For businesses looking for expert support to create the optimal loan application, Inventya’s 360 Financial Plan presents a comprehensive solution. This service leverages cutting-edge technology, alongside expert guidance to craft detailed, data-backed financial projections and business plans. Furthermore, by utilising Moody’s Analytics Riskcalc and Open Banking data, it offers a nuanced Probability of Default analysis and a transparent credit risk report. Find out more and book a free consultation with us here.

February 8, 2024
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