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SMEs are encouraged to apply for funding before it is too late

Small business owners are encouraged to apply for financing before the predicted economic downturn renders increasing numbers of businesses cr

SMEs are encouraged to apply for funding before it is too late
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Small business owners are encouraged to apply for financing before the predicted economic downturn renders increasing numbers of businesses creditworthy.

UK Finance, the trading body for UK banks, said rising interest rates, rising inflation and a possible recession could have a devastating impact on the ability of many SMEs to qualify for credit.

SMEs are therefore advised to determine how much money they may need to survive a downturn, and now apply for funding, even if they do not immediately need the extra funds.

Stephen Pegge, Managing Director of Commercial Finance at UK Finance, said: “If you wait until the downturn has hit, and find you have an urgent need for financing, it may be too late.

“It is better to think ahead and act now to get a financial buffer to hold for the next year or two. This way, if you are asked to provide any additional information to support your application, you will have time to do so. And your business – and the financial position of your customers – will probably look better. ”

Recent data shows that many companies are already turned down funding. A report released by the Federation of Small Businesses (FSB) earlier this month stated that a record low percentage of just 43 percent of firms applying for funding was approved in the first quarter of the year.

UK Finance disputes this figure, which indicates that the true proportion of approvals is around 75 per cent.

But whatever the reality earlier this year, there is little doubt that finance companies are likely to become more cautious as business conditions deteriorate.

See also: Borrowing money to pay for inventory: inventory financing, credit cards, loans and more

Improve your chances when applying for funding

There is no one-size-fits-all approach to business financing, as almost all loans and credit facilities are negotiated individually, depending on the company’s unique circumstances.

In general, however, banks and specialist lenders will take different views for newer companies compared to more established firms.

If your company has been trading profitably for some time, you may not be asked to provide any security or personal guarantees – banks may be happy to lend based on your good credit record, solid repayment history and sound profitability.

However, most banks will also look ahead to your prospects and the developing economic environment, so the more evidence you can provide to prove that you are a good risk when applying for financing, the better.

Top 7 Tips to Get Your Credit Application Approved

# 1 – Set up a cash flow forecast

You may be asked to make a cash flow forecast, with income and expenses set aside for the period of the financing agreement. Unfortunately, rapidly rising prices make it increasingly difficult to compile accurate cost calculations, because no one knows what prices will be in six months or a year. If this is a problem, show a series and explain how your business would end up in the worst case scenario, showing the lender that you have thought through all the contingencies.

# 2 – View customer contracts or documented orders

If you can show that you have a certain amount of business that is effectively guaranteed by your customers, collect the paperwork to provide to the lender if requested.

# 3 – Set up security

If you are a relatively new company, the borrower will probably want some security in the form of personal guarantees, which makes the borrower personally liable for the debt. It can endanger personal assets such as the family home if you are unable to repay. It’s a big bet – if your business struggles, you could end up bankrupt. But if you have confidence in your business, it will significantly increase the chances of getting the money you need.

# 4 – Build a good credit history

Another common problem for younger companies is that they often do not have an established credit history. So it can be wise to build a credit profile, even if you do not have to borrow for anything.

For example, if you know you will need substantial financing at some point in the future, consider taking out a few smaller loans to pay for business items, even if you could afford to pay cash for them. This way, you can set a good credit record that will improve your chances of being approved for a larger loan later.

# 5 – Clean up your bank statements

Some lenders will want to see three or six months of bank statements to determine the state of the business. It can therefore be worthwhile to defer any major expenses until after you have secured your finances so that your bank statements look healthier. There is nothing dishonest about this, it’s just good housekeeping.

# 6 – Consider Financing to Smooth Cash Flow

There are numerous financing schemes specifically designed to help with cash flow problems. There are simple cash flow loans, which are usually unsecured, and are only approved based on the performance record and prospects for the business. But in common with many other business financing schemes, they almost always require personal guarantees.

Alternatives include invoice financing and asset financing. It is insured on your outstanding invoices or business assets such as machinery. However, it is becoming more common for lenders to ask for personal guarantees, even with assets or invoices as security. Too many lenders are stuck with specialized industrial machinery that they can’t sell – for example, who wants a £ 80,000 used embroidery machine? You can see their point.

# 7 – Go to a realtor

Business finance brokers can be invaluable because they know the lending criteria used by the various finance houses and can quickly match you to finance companies that best suit your needs. Business finance is a minefield and there are many, many other types of financing and loans that I have not mentioned here. Brokers are well placed to advise you on financial products you may not have even heard of.

They also help prevent time wasted with failed applications to lenders using algorithms to filter out unwanted applications. Firms like Funding Circle, Capify and Fleximize, among many others, evaluate various parts of your application with an algorithm, but exactly what these computer systems look at differs from firm to firm – some look for County Court Judgments (CCJs), some go the status of your VAT payments, some check your most recent accounts or financial position at Companies House.

If you do not know the criteria, you can waste valuable time approaching firms that will never consider your business when applying for financing.

Brokers can be a great shortcut and can often find financing, even if you have a less-than-perfect credit history. The downside is that they charge an average of 5 percent to 7 percent of the borrowed amount. For many, however, it is a price worth paying.

Nick Gardner is a director at Air Exchange, the UK’s only money transfer auction platform for SMEs

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