What Lenders Look At Before Approving Your Loan Application

The number of businesses approaching alternative lenders instead of their high street banks has been on the rise in recent years and the break of the bank-borrowing mould as a consequence of that has been a refreshing change for SMEs.

Whilst a decade ago there was a huge lack of awareness among small businesses about the alternative funding routes to be explored, SMEs are now far more in the loop with regards to business funding. In fact, the research we conducted last year found that 94% of SMEs are aware of the finance options available from both alternative lenders and banks.

Alternative platforms have successfully managed to exploit the subdued attitude the banks still have with lending to SMEs, meaning that businesses now have so many viable funding options to choose from.

If you have spent some time looking into the different funding sources your business can access, you will have probably come across statements talking about the more forgiving criteria expected from alternative lenders compared to the banks.

You may have also heard that alternative lenders are considerably more understanding of the difficulties SMEs face, but just how different are the expectations of the alternative finance industry to that of the stringent criteria of the banks? What do alternative lenders really care about when considering whether to lend to you? In this blog, we divulge everything your SME needs to know to ensure you get that much-desired stamp of approval.

Your Business’s Commercial Credit Score

Whenever you apply for commercial funding, whether that is with a bank or an alternative lender, the financial institution you choose will perform a credit check before approving the loan. Your business’s credit score is calculated by taking various considerations into account and all lenders, including those in the alternative lending landscape, will refer to this score before agreeing to lend a business any amount.

Your business’s commercial credit rating is calculated by credit reference agencies and they will allocate a score to your company that tells lenders the creditworthiness of your SME. A bad credit score will reduce the number of lenders who are willing to provide a business loan to your company, so it is important to regularly check your commercial credit rating so that you can avoid any negative changes.

But don’t despair if your business has a less than favourable credit score. Firstly, there are ways to improve it, so your SME is not doomed to a future of financial instability and an uphill struggle. For suggestions on how to boost your commercial credit score, read our guide on how to improve your business credit rating.

Secondly, even with a bad score, it does not necessarily mean that your hopes of obtaining finance for your business are dashed entirely. There are still several lenders that will be open to lending your SME the funds it needs to make vast improvements to its financial health and the team at Nucleus welcome all applications as we prefer to provide decisions based on each case.

We understand that there are, in some instances, cases with grey areas that should not be automatically written off just because a numeral value was assigned to your business following a few historical mistakes.

The Age of Your Business

Regardless of whether you are applying for a loan with a bank or alternative lender, one of the first questions they will want answering is how long your business has been established. When a lender is providing funds to a business, they will of course want to ascertain whether they are eventually going to get the amount (plus interest) back and for businesses that have a good few years in operation behind them, lenders can determine that repayments are likely to be made – that is, of course, provided the business has a positive credit score and no red flags on their record.

For this reason, start-ups find it particularly difficult to acquire funding. Brand new businesses with no ability to demonstrate profitability are considered a bigger risk to lenders, but just because start-up loans are not so readily available, it doesn’t mean that they are unattainable full stop.

Our Property Finance product is a secured business loan that is backed by residential or commercial property. It is perfect as a means to provide start-up capital as you will not be required to demonstrate the profitability of your business but instead will only need to provide a cash flow forecast and a fully-fledged business plan.

Collateral to Secure the Loan Against

When lenders are looking to provide funds to businesses on a loan basis, the first thing they consider is the level of risk involved in lending money to that particular company. Providing security as leverage enables businesses to access the money they need at more competitive rates – and often with longer-term lengths, which is especially desired if an SME is currently working towards huge growth ambitions.

Secured business loans are fantastic for businesses that are hoping to borrow much larger amounts and by providing assets to secure the loan against, lenders feel happier approving bigger loan applications.

Asset based lending is a popular approach to commercial finance and with Nucleus, your SME can use any mix of business assets to access between £100k and £50m. Whether it’s invoices, machinery, stock or a combination of assets, providing security will enable your business to access the working capital it needs to expand, thrive and succeed.

However, some entities are not comfortable with providing collateral in order to obtain business funding. In these instances, unsecured business loans are a more attractive option. Our Business Growth Loans are ideal for businesses wanting to borrow smaller amounts and with quarterly top-ups available, this type of funding is great for keeping your company’s cash-flow healthy.

Income vs Expenses

Having a high level of income boosts your chances of attaining funding for your SME, but if the outgoings of your business are also particularly high, that may be cause for concern for lenders. Sensible lenders will do their due diligence before approving any loan and in many cases, whilst your business might not receive a resounding no on a loan application, it may be met with a more realistic, lower offer.

If you don’t receive approval on the amount you applied for, don’t be disheartened. A lender’s biggest priority is that you are able to repay the loan plus interest and in order to establish the likelihood of that, they will refer to the inflow and outflow of cash in your business. If a lender is not convinced that your business will be able to confidently make repayments, that means your accounts and profitability statements don’t support a conclusion that the loan amount is the right fit.

Rather than feeling disgruntled with the approved amount, consider it a good sign as your business will only be paying back what it can realistically afford. With our Business Cash Advance (BCA), the funding is calculated on your card takings for the year and there is no fixed monthly amount to pay. That means your business only ever pays back a percentage of what it has made each day and as a result, your SME will never hit a cash flow crisis due to loan payments it can’t afford.

Business Plan

If your business is fairly young, perhaps even a start-up, it’s likely that your chosen lender will want to see a cash flow forecast and a fully-fledged business plan. You’ll need to include market analysis, a description of your company/what it does, financial projections and of course, an executive summary. It’s worth putting the time and effort into creating a bullet-proof business plan as this will help your business to secure more attractive loan facilities.

Bank Statements

As part of the underwriting process, lenders will deep dive into your business’s bank statements to determine how much money your business is spending and why. It’s common for lenders to ask for at least 3 months’ bank statements. In the lead up to your loan application, it’s really important that you consider company spending and it’s a good idea to cut back wherever possible in the months leading up to your application, as lenders want to see that your business is able to handle its expenses responsibly and that repayments won’t be a struggle either.

Industry

With commercial loans, there are preferred industries that the majority of lenders look upon favourably – and of course, some high-risk sectors that lenders avoid working with. Restaurants, hotels and retailers stand a better chance of securing business funding with most lenders, whereas SMEs forming part of the gambling or construction industry, for example, tend to generally struggle.

If your business is deemed high-risk, that does not necessarily mean that funding is out of reach entirely. There are lenders who specialise in providing business loans to high-risk industries and in many cases, SMEs who are deemed to be risky can access funding – but that might mean accepting a loan amount that is less than what was wanted or having to accept a higher interest rate.

At Nucleus, we work with companies involved at all stages of the supply chain within the construction industry, with our Construction Finance being best suited to firms needing between £100k and £50m.

Full Set Of Business Accounts

Note we mention full set, rather than abbreviated. Whilst some lenders might be happy to accept abbreviated accounts, the majority will ask for the full set of accounts as these contain an important document which the former does not – the profit and loss statement. As part of the full set of business accounts, lenders will also expect to see a balance sheet, both the director’s & accountant’s report and detailed notes on your business’s accounts

Personal Guarantees 

Lenders may offer you a business loan, providing you’re happy to provide a personal guarantee as part of the conditions set out in the loan offer. A personal guarantee is a promise from either one or multiple directors to repay finance if the business can’t. Also known as a director’s guarantee or agreeing to act as a guarantor, this approach can help businesses unlock finance to improve cash flow and expand.

Ultimately, there is no one single determining factor that lenders will look to before either approving or rejecting your loan application. Each lender has its own criteria and boxes that it expects to be ticked before agreeing to provide a business loan. It’s always advisable to do your research, understand the different finance products available to your business and determine the terms which are most suitable to your growing business.

For more small business advice and tips, read our related posts below. If you are experiencing cash flow challenges or want to realise your business growth plans, Feel free to browse our unsecured funding options and apply for a loan at your convenience!