The Experts: Questions lenders never want to hear
20 January 2017
“How much can I borrow?”
“What am I entitled to?”
“What’s the maximum you can get me?”
These are questions I hear all too often, and ones that most lenders don’t like to hear.
A lot of the time, customers ask “how much can I borrow?” out of curiosity — for example, they may be unfamiliar with other lenders’ policies compared to their own bank. Others ask the question because they want to raise as much as they can for their business. In the latter case, you will find you do more harm than good to your chances of funding.
Different approaches achieve different results
Let’s say you approach a lender asking for £40,000 to service a new contract. The lender will see the reason you want that amount, and will also note that you have taken the time to calculate how much you need. After underwriting they may decide you can only afford to pay back £25,000, and offer you that amount instead.
Although this situation might not be ideal, it shows the lender believes the business is strong and has a valid reason for funding, even if they’re not prepared to offer the original amount you asked for.
On the other hand, if you approach a lender asking for the maximum possible to ‘grow your business’, it doesn’t show a real plan or a guarantee of income from the money. There may still be a viable business reason for needing funding; but starting the process with ‘how much can I get’ isn’t very helpful.
How much am I entitled to?
I hear this question more than you might expect. The truth is, you are ‘entitled’ to nothing — and it’s up to you to demonstrate why the lender should want to lend you money. The real question is, what can you afford to pay back? This is the question you should ask yourself when looking to apply for funding.
Let’s have a look at two examples of company finances, and which of them lenders might be more inclined to lend to. Both companies want to raise £50,000 for three years, to hire new staff and increase marketing spend to help grow the business and brand long-term.
- Trading since 1999
- Three directors
- Healthy turnover of £1.6million (increased since last year)
- Profits of £80,000
- The directors took out dividends of £120,000
- Trading since 2010
- Two directors
- Steady turnover of £400,000 (hasn’t changed since last year)
- Profits of £28,000
- The directors chose to keep profits within the business
On the face of it, Company A looks more attractive, right? But in the eyes of many lenders, this would not be the case. Company A might be making larger profits, but with the directors taking out £120,000 the company is actually making a £40,000 loss. This would make it difficult for the lender to see room for affordability.
Company B, meanwhile, might only have a quarter of Company A’s turnover, with a shorter trading history too, but because they’re making better profits (7% vs 5%) and keeping them in the business, they’re probably a more attractive prospect for the lenders.
If Company B maintains their current level of turnover and profit, they should make approximately £84,000 over the next three years, which shows they’ll be able to afford the loan of £50,000 and interest. If things go to plan and turnover grows, their future looks brighter still. Company A on the other hand would make a £120,000 loss if they continued on their current path for the next three years.
It’s important to note that this isn’t an exact science, and different lenders look at different things during their underwriting process. Some say they can lend the equivalent of one month’s turnover, others will lend 20% of annual turnover, and some go as high as 40% of your balance sheet. But whatever the lender, it all comes back to affordability.
Regardless of the lender’s individual policies, they will want to ensure that you can afford to pay back the funds. So if you approach a lender that will do 20% of annual turnover and your turnover is £1million, you should be entitled to £200,000, right? But wait — what did we already learn about that word?
It’s very possible that after other checks, the lender feels you can only demonstrate an ability to pay back a loan of £75,000. The fact is, lenders do this many times a day, and underwriters typically have years of experience in their field, so try to trust their judgment and appreciate that what you feel you can pay back might differ from what the lender thinks.
At the end of the day, if the offer is lower than you asked for, remember that you’ve been approved when thousands of other businesses aren’t so lucky. And next time you’re looking for funding, look at what you can afford, and approach the lender with a plan.