starters

27 February 2017

How to file a loan application... And receive a “yes!”

Forget the idea that banks stop lending in times of crisis. More than 200 new businesses are set up every day in Belgium, and a considerable number of these receive support from banks in the form of loans. How can you make sure that doors open for you too?

Is it a good idea to take on debt?

Firstly you need to ask: is it a good idea to take on debt? Yes. Borrowing funds may have a positive leverage effect for the business, provided the loan costs less than the profit generated by the business. In other words, if the return on the business activity is higher than the cost of the loan, the more the business borrows, the greater the return on equity. However, if it is less than the cost of the loan, the opposite will be true: this is referred to as the scissor effect. Wanting to finance everything from your own funds is a bad idea. Hoping to finance everything with bank loans is unrealistic. It is all a question of balance.

A sound dossier to back your application

Many start-ups with sound plans may seek help from the bank. A word of advice before you set up your meeting: prepare a sound dossier. Obtaining a loan is partly a question of trust, and trust must be earned! You will not always meet those who will decide whether or not to grant the loan requested. Generally your branch manager or personal advisor may not decide on their own. Their job is rather to champion your project. Help them! Despite their support, your loan might still be refused by your bank's credit unit, but without them it certainly will be.

What your bank needs to know

Your bank will ask itself several key questions:

  • Is the customer known to the bank and trustworthy?
  • Does the loan application meet a valid need?
  • Does the dossier show real potential in both the short and long term?
  • Can the customer cover the loan charges?
  • Is the loan amount in line with the customer's financial situation and assets?
  • Does the bank have sufficient collateral?
  • Is the relationship with the customer likely to be profitable for both parties?

Before meeting with your bank, you can test the feasibility of your project using the Business Idea Calculator. This will give you an initial financial estimate and tell you whether your idea is worth developing.

Some tips for a good presentation

What should a good dossier contain? Volumes have been written on this topic. Here are a few tips from the world of business.

Firstly present yourself as a cautious manager rather than a bold salesman.

Take care over your presentation and over the documents you submit to the person you are talking to. First impressions are often right! Also take the time to explain your plan in detail. Prove to your bank that you know the business and the sector, and highlight your skills.

Furthermore, be pragmatic and present three different budgets, each in line with market realities: one optimistic, one pessimistic and one middle-of-the-road. Do not try to inflate your forecasts: it will not do you any favours.

Besides the financial elements, do not forget to point out the company's skills and advantages. The (high-end or loyal) client base, the (exclusive, etc.) range of products, the active network of distributors, the team of advisors, etc. are all factors which will increase the trust of the person you are talking to. It may also be a good idea to show the order book, underline positive developments in recent seasons, point out your good relationship with the bank and that you have honoured previous commitments.

Want to know more about how to present yourself and your project? Read our article about this subject.

Your loan amount: be realistic

When you estimate the amount to apply for, bear in mind that every business has a maximum level of debt. It depends on its equity, the business activity (profitability, etc.), the sector in question and the ability to repay. However, do not underestimate the amount of your loan application through fear of the loan being refused. Statistics show that refusals are not linked to the amounts requested.

While over-estimating your requirements is not an option, you should however bear in mind that:

  • An investment often costs more than planned
  • Revenues generally do not come in as quickly as you had hoped
  • A budget set aside for overlooked or unexpected costs may prove useful.

If you have failed to take such contingencies into account, you might soon be faced with a cash shortfall. Furthermore bear in mind that a negative forecast result is not necessarily catastrophic. Your bank will also look at other criteria, such as the cash flow (self-financing capacity) and the break-even point.

Equity and collateral

Do not forget about the equity and collateral you might be in a position to provide. Be prepared to answer direct and sometimes searching questions. For example, "Why are you going to succeed? And if it does not go as you expect, what guarantees can you give?" The collateral can be negotiated, depending on the soundness of your plan and its presentation. Do not overlook regional structures which can help you to provide the collateral needed. Too few entrepreneurs are aware of the existence of these institutions designed to help them.

3 TIPS TO REMEMBER
  • Prepare a strong and reliable dossier for the bank.
  • Consider several scenarios: optimistic, middle-of-the-road and pessimistic.
  • Be realistic and think about allowing a margin. You will need a minimum level of equity to successfully complete your project.
Consider timing

Timing is important. Make your application in good time. It may take several days or weeks to decide or to pay out the money if further information is requested.

However, you can be reassured on one point: a credit centre exists for loyal and trustworthy customers A loan can be granted over the phone in 48 hours. To that end, prepare the following documents:

As a self-employed individual

  • Most recent tax assessment in your possession. This document is sent to you by the FPS Finance after you have filed your tax return.
  • Your most recent operating account (related to the most recent tax assessment) including your income from self-employment, your turnover, your depreciation and details of any financial expenses.
  • Estimates and/or purchase orders already signed.
  • Any other document that you consider relevant in the context of your loan application (other income, other expenses, etc.).

As a manager/director of your company

  • The most recent balance sheet published.
  • Provisional figures for a minimum of six months of operation, including the following parts: Assets, Liabilities, and Profit and Loss Account.
Check the figures for your loan with a professional

To give yourself the very best chance, you are advised to arrange for an accountant to check and examine your loan application beforehand. Together with the bank, they will be able to offer you the best option. There are also several infrastructures for business owners which will offer advice and information. They will be able to look at the financial balance of your plan with you in advance, verify that you will be able to repay the amounts requested, etc. And don't forget that there are a range of solutions depending on your short-term, medium-term or long-term needs.

The 10 items you should include in your loan application
  • Summary page in diagram form showing the four key features: who, what, how and how much.
  • Your CV: experience, motivation, strengths.
  • Dynamic presentation of the concept/plan.
  • Launch AND development strategy, taking into account the market and competition.
  • Commercial approach: advertising, communication, public relations, etc.
  • Organisational aspects.
  • "Broader" budgets (optimistic, pessimistic and middle-of-the-road situation), indicating the forecast profitability, the optimum allocation of resources taking into account investments and other requirements as well as cash flow projections.
  • Envisaged legal structure (SPRL, SA, etc.).
  • Precise wording of the application.
  • References/useful contacts

Ensure that your dossier is clear, comprehensive and, above all, easy to read. Illustrate your plan with specific arguments backed up with figures. Take care over both content and form.

Need to fund your project?

New funding solutions are emerging, for example crowdfunding, business angels and private equity. Who are they aimed at and why use them? Find out more about these types of funding by watching our webinar.