NatWest Cymru supports 20,000 businesses throughout Wales so who better to ask about pitching for a start-up loan? Katie Baker, one of the bank’s Business Banking Relationship Managers, talks readers through the dos and don’ts of applying for a business loan.
More and more people in Wales are taking the exciting step of starting their own business. In fact in 2017 over 14,000 entrepreneurs launched their own enterprise and that figure looks set to grow over the next 12 months.
The biggest challenge for most people starting a business is securing the cash they need to take them through that all important first year and onwards to greater success.
Encouragingly banks want to lend money. Last year NatWest lent around £250m to businesses in Wales, £2.5m of which was to businesses I support in Gwent and Powys.
Yet that doesn’t mean there’s a blank cheque book. It’s our duty as a responsible lender to protect customers and look after their interests, but with the right proposition and preparation entrepreneurs can be confident they’ll get the support and funding they need.
Typically a bank will lend 50% of the start-up funds a business needs, with the expectation on it being able to provide the remaining amount. This can be done through a variety of mechanisms including cash, assets and grants, and in some circumstance a bank will lend above this loan to value figure.
Crucially, a business needs to have a business plan that gives a bank’s credit team the confidence they need to press the green light.
When a start-up business comes to me I look at two things – the business plan and the person; the individual looking for the loan is just as important to me as the business they are looking to launch, which is why I often ask for a CV.
So what are my top tips for writing a business plan and providing the information you need to get a loan?
Number one would be keep things simple. No bank is looking for pages and pages of information. We provide lots of really useful templates on our NatWest business website, but in keeping things simple I’d say to follow this basic formula: What, How, Who, Where and Why?
What? What will your business do? Is it a product or service for example?
How? How will the business be implemented and how will it generate income? Pricing? How do your figures compare with competitors and are they realistic?
Who? Who will deliver it? Details of your experience and if you don’t have experience in the sector you’re launching in how will you overcome this e.g. training, additional support?
Where? What is the market you’ll be operating in? What is the competition and who are the competitors? Who are you going to sell to?
Why? Why do you think your product or service is needed in the local market? What are its USPs? What gap in the market will you fill?
Know how you will make a profit. It’s also important you get your financials right. Banks are generally looking for two things – a three year cash flow forecast and three year profit and loss forecast. A lot of businesses have the misconception that banks want to see a lot of cash to cover debt. We completely understand that a business will typically have a lot of up front costs that won’t be there when it moves into years two and three.
Know your cash requirements. Payment terms can also result in working capital need for your business. If you’re invoicing on 30 or 60 day terms how will you pay your outgoings in the meantime? Displaying an understanding of your cash flow and working capital requirements gives a business manager confidence in your proposition.
We will measure affordability using your EBITDA – earnings before interest, tax, depreciation and amortization. Essentially this is a measurement of the business’ overall financial performance and is an alternative to simple earnings or net income.
We also want to see that you have enough money to live so we’ll look at your personal finances as well. Many businesses say they won’t take a salary in the first year so that they can reinvest the cash in the company, which is perfectly plausible. However, you’ll need to be able to demonstrate where the funds will come from to pay your personal commitments – for example, a partner’s income.
With all of this information we can decide upon your suitability for funding and whether we can support your application. Ultimately, we want to support you and help to make your business a success. Maybe 2019 will be the year you start your own business? If it is make sure you visit your local bank to see how they can support you along the way.