The time arrives in most small businesses when you’re required to go borrow some money. It’s in your best interest to make your business as attractive as possible before presenting yourself to the lender.
The good news is that if you know what the lender is looking for you’ll be able to take appropriate steps to get your business in the best possible shape.
1. Ensure your financials are up to date
Not having the most current financial reports can make applying for loans harder than it should be. If you’re a new business, your trading history may not be long enough. Your business may be growing and the financials of 18 months ago don’t reflect the current situation. If your accounts are more than two years out of date, you need to see your accountant now.
Ideally, the trend across the years is positive or steady, and you should have an explanation ready for any dramatic changes.
2. Tidy up your balance sheet
Most small business owners fully understand what the Profit and Loss is, but I find that the Balance Sheet is often the neglected little brother.
It’s time to change that, the Balance Sheet and P&L together shows the complete financial health of your business. The balance sheet is so important because it shows what your business owns and what your business owes.
I often see shareholder loans to the business classified as Current Liabilities – this means that the business expects to pay this back within 12 months. The bank will take all current liabilities into account when assessing the loan, and perhaps this should be reclassified as a non-current liability.
Ask your accountant to review the balance sheet and ensure that things have been correctly classified.
3. Ensure your tax lodgements and payments are up to date.
Every request to provide financial information for business finance includes the following…
“12 month summary of the client’s integrated client account with the ATO”
In case you haven’t heard of this before, the Integrated Client Account is the running tally the ATO keeps of all BAS /IAS lodgements and payments. It shows the bank whether you have:
- a) Lodged your BAS on time. It shows the date you lodged a BAS.
- b) Whether you pay your BAS on time. It shows all payments you make and whether you’ve been charged interest by the ATO for being late.
- c) Whether you have a large outstanding debt to the ATO.
Before you approach the bank, make sure you have lodged all your BAS and your tax returns are up to date.
4. Know the Key Performance Indicators the banks look at.
The lender asks for your financial statements because they can extract an extraordinary amount of information out of them.
Banks are looking for profitability and financial stability. They will take out some key numbers, enter them into a spreadsheet (or another system) and it will spit out a few key ratios and how they compare to their allowable range.
- Gross Profit Margin = Gross Profit / Total Sales
- Net Profit Margin = Profit before tax / total Sales
- Current Ratio = current assets / Current Liabilities
- Total Assets
- Debt service coverage ratio = net operating income/total debt service
Compare your business to the industry through some publically available state such as the ATO small business benchmarks to see how you stack up.
Finally, it’s always helpful to have somebody on your side, such as a relationship manager or trusted advisor.