What’s the difference between a bank and an alternative lender? One of the most significant is the different requirements banks place on small businesses before offering business finance. Here are just six of the things your bank is likely to require, whereas an alternative lender won’t:
1. A detailed business plan.
Most banks will want to see a business plan document before advancing a loan. Business plans don’t have to be long but they do have to be detailed, offering a concise overview of the company, the principals behind it, the product range, the financial position and your vision for the future. Of course, a good business plan can focus the mind and be invaluable to a company’s future, but when you need quick finance and have orders piling up it’s the last thing you want to be drafting.
2. Comprehensive financial details.
If they’re thinking of lending, a bank will want to see financial paperwork. Plenty of it. Details of current and past loans and debts, bank statements, certificates confirming investments, credit card details, tax returns… you name it. If you’re running your business efficiently, you’ll have all this on hand, of course, but even then assembling it can be time-consuming. Opt for an emergency loan, asset-based finance or invoice factoring or discounting from an alternative lender and you can spend the time doing something useful, like growing your business.
3. Audited accounts.
However, the most time-consuming financial documents have to be your balance sheet (which lists all your business assets, liabilities and capital) and profit and loss statements (which normally need to go back at least three years). In some cases, these documents will need to have been audited—a process that can cost four figures. Either way, you may not have the in-depth information the bank needs, nor the time or resources to assemble them against a tight deadline.
Related Article: 3 Alternative Ways to Finance Your Small Business
4. Information on your personal finances.
Here’s where it gets personal: there’s a good chance the bank will want to examine your own, non-business, finances (as well as those of any partners or co-directors). The information they’ll need could span your national insurance number, net worth, assets (including your home, car and bank balances) and liabilities (including your credit card debts, car loans, mortgages and more). Then when you’ve assembled all that, they could demand a personal guarantee, placing your private assets at risk if the business fails or merely misses a repayment.
5. Complete details of your cash flow.
A steady and predictable cash flow is a huge asset when seeking bank finance. You may therefore be requested to supply client-by-client information on your accounts receivable, enabling the bank to check the creditworthiness of your customers. They may also demand sight of your accounts payable, backed by credit references from companies that sell to you. Many businesses do not maintain this kind of in-depth information in the first place, providing a potentially insurmountable hurdle.
6. Life insurance policies.
The smaller the business, the more likely its success is to depend on the personalities and skills of its founders. For this reason, banks may insist on comprehensive life insurance policies safeguarding against the death of one of the principals. Worse, they may insist on becoming the first beneficiary, using any proceeds to pay off debts.
These factors all add up to considerable difficulty in securing small business finance from a bank. In contrast, alternative lenders require none of the above and offer quick decisions—choose an emergency loan and the cash can be in your account inside 24 hours.
Author: Carl Faulds is a business recovery specialist. He started work in the Business Recovery profession in 1990 and has continued to pursue an ethos of working with distressed businesses to help them overcome their financial problems. As Managing Director of Cashsolv, he offers both business finance and advice and support to overcome cash flow problems and identify possible underlying problems that can be addressed to ensure a positive future for your business.