UK retail banks do appear to be lending more, as we have seen with our own clients, but what are the key metrics that they will be looking for before they decide that you are a good bet?
Damian Evans explains: “It’s all about the three “Ss…Stake, Security & Sustainability”
Stake – how much you have invested in the business? If you are asking for £100k then a bank will ideally want to see you matching their funding with £100k yourself, in the form of share capital or retained reserves.
Security – banks don’t just lend money. If you are sole trader, it is implicit that you will be liable personally for the debt. But when lending to a company, the bank will want to pass on some of the risk to the Directors, which may be in the form of a personal guarantee or a charge over the Director’s home.
Sustainability – a measure of how well you can make the repayments. Lender don’t look at profit before tax; they look at both EBITDA (“earnings before interest, tax, depreciation and amortisation”) and more importantly, at cashflow. The cashflow statement is the most important part of any forecast provided to a lender as you need to show that you are capable of making the repayments (So remember the old adage: “turnover is vanity, profit is sanity but cash is king”. )