Small business finance: what today’s lenders look for

For many SMEs, accessing the right business finance can be the key that unlocks growth. Whether you need to invest in new equipment, hire extra staff, launch new products or services, or enter new markets, extra funds can make the difference between success or stagnation. Unfortunately, many lenders are currently very cautious, making it much more challenging to secure business finance.

That said, there are plenty of things you can do to increase your changes of securing funding. In this blog, we look at what lenders are looking for, the common pitfalls to avoid, and share our top tips for success.

Why small business lenders are cautious

Recent years have been challenging for lenders. A more unpredictable economic climate, periods of high inflation and market instability have made lenders much more cautious. While there are more routes to business finance than ever – including banks, challenger lenders, fintech providers and government-backed schemes – each require you to demonstrate that your business is financially stable and capable of meeting repayments.

Your accounts are the evidence lenders rely on. Without accurate and up-to-date financial information, an otherwise strong business case will struggle to secure funding.

What business finance lenders look for in your accounts

When you submit an application for business finance, lenders will look closely at the following areas.

• Up-to-date financial statements. Depending on when you submit your application, annual accounts may not be enough. If you are able to submit recent management accounts, they give lenders a more current picture of your performance.
• Profitability and cash flow. Dependable cash flow and consistent profits show you can afford repayments. This may have more weight with lenders than turnover.
• Balance sheet strength. A strong balance sheet showing assets, liabilities and ownership equity can show you have financial resilience.
• Credit history. Your credit history is likely to be checked, so any late payments or defaults will weaken your application.
• Consistency. Sudden spikes in revenue or costs will raise questions – lenders like stability.
• Future forecasts. Cash flow plans forecasts and business plans are vital to show how you’ll repay any finance.

Mistakes that undermine business finance applications

While it’s important to know what lenders are looking for, it’s just as crucial to be aware of common mistakes. Below are some of the most common slip-ups businesses make when trying to secure funding.

• Submitting late or incomplete accounts
• Providing overoptimistic financial forecasts
• Having unpaid tax liabilities such as VAT or Corporation Tax – these are a major red flag to lenders
• Asking for unrealistic amounts of funding
• Not adhering to application guidelines – read them carefully!

How to prepare your accounts for a loan application

If you are making an application for business finance, it’s wise to work with an accountant to get your accounts and supporting information in ship-shape condition. For example, a THP accountant can help you do the following:

• Prepare up-to-date management accounts
• Use cloud accounting software to produce real-time data as needed
• Prepare cash flow forecasts to show how you’ll make repayments
• Review your business plan and make sure it’s supported by your financial information
• Negotiate terms, helping to make sure they are as favourable and manageable as possible

Where can I get finance?

Most SMEs will turn to traditional lenders, such as banks. There’s nothing wrong with that, and if you successfully get business finance from them that’s great! However, depending on your needs, you could also consider:

• Asset finance. You can borrow against assets like machinery, vehicles or equipment.
• Invoice financing. Some companies will (for a fee) advance cash tied up in unpaid invoices.
• Alternative lenders. These might include fintech or peer-to-peer lenders.
• Government-backed schemes. These include schemes offered via the British Business Bank.

While these may widen your options, remember that success still relies on robust, transparent accounts!

Final thoughts

If you want to secure business finance, you need to combine a strong belief in your business case with well-prepared accounts. Lenders want to see that your figures add up and you’ve thought realistically about the future.

If you’d like help applying for business finance, talk to THP. When we act as your accountant, we can help you get your accounts ready, prepare forecasts and guide you through the application process. Get in touch today to get started.