Top Tips on Steps SMEs can take before Applying for Finance
Contrary to some perceptions, most applications for bank loans or overdrafts are successful, but there are certain types of application and applicant that are less likely to end the process with a facility. Data from the SME Finance Monitor provides pointers to steps SMEs can take before they apply for finance, to improve their chances of success…
Since the SME Finance Monitor started in the Spring of 2011, SMEs have provided details of more than 5,000 applications for new or renewed loan or overdraft facilities. Over time, we have seen a mis-match between success rates for these past applications and confidence that the bank would agree to a futureapplication – in the latest report, for Q3 2012, a third of those planning to apply were confident that the bank would agree to their request compared to the 7 out of 10 of applications that have resulted in the SME getting a facility. It is also true, however, that fewer applications for a new or increased loan/overdraft facility were successful (56% now have a facility) compared to those where the SME was looking to renew an existing facility (91% now have a facility).
Statistical analysis of the data available from the Monitor revealed a number of significant predictors of whether an application for new funds would be successful or not. While these cannot tell the whole story, and some of them are factors an SME could not change overnight, they do provide some useful pointers to those thinking about applying for facilities.
So, what are the key factors about an SME that impact on an application for finance?
Size and external risk rating
When it comes to applying for new facilities, success rates improve with size and external risk rating – half of 0 employee applicants for new funds are successful, rising to 9 out of 10 of those who have 50-249 employees. Most SMEs are small – around three-quarters have no employees and only 4% have 10 employees or more. Half of all SMEs have a “worse than average” external risk rating, and this risk rating is more likely to be applied to those with no employees (57%) and those in business for less than 2 years (79%).
Avoiding credit issues
While an SME thinking of applying for finance is unlikely to be able to do anything about the size of the company in the short term, managing your finances to avoid credit issues (and hence avoid damaging your external risk rating) can make a difference to the outcome of an application. 13% of SMEs reported some form of credit issue in the year before they were interviewed, typically an unauthorised overdraft or a cheque bounced on their account, and this was almost as likely to affect larger SMEs as smaller ones.
A financial decision maker with relevant training/qualifications
Those who have someone in charge of the finances with a relevant financial qualification or training are more likely to be successful with an application. Overall, 25% of SMEs have such a person in charge of their finances, and this increases from 22% of those with no employees to three-quarters of those with 50-249 employees.
Producing regular management accounts
Businesses that keep a regular eye on their financial performance through the production of management accounts are more likely to be successful with an application. 4 out of 10 SMEs currently produce such accounts with marked differences by size of business – a third of those with no employees produce management accounts, rising to 9 out of 10 of those with 50-249 employees.
Shiona Davies is Director of Financial and Business to Business Research at BDRC Continental, is the author of the SME Finance Monitor – a quarterly report looking into SMEs and their access to finance. This independent report, published by BDRC Continental, is used by government, banks and business groups to inform the debate around lending to SMEs.