A good business plan? A good credit record? Or simply a smart suit? What does a bank manager really look for when you go to them for help?
If you have a long-standing relationship with the bank, you may think that they know enough about your business to make a decision about a loan quickly. Don’t make this assumption. Even if you have a great relationship with your bank, remember that it will make a decision based on the merits of the case you put forward, so treat each application as if it was the first time you’d talked to them.
So how do you make a case – and what are the qualities that banks look for in a potential loan? Mark Blayney, author of “Raising Finance for your Business”, turned the qualities that banks look for into a simple mnemonic: CAMPARI. This stands for Character, Ability, Means, Purpose, Amount and Insurance.
Character, ability and means
“Character” doesn’t just mean wearing clean shoes and being presentable. It means a tangible record of being reliable with money. Have you made promises to the bank previously that you haven’t delivered on? Have you got a track record of previous financial problems? These are the kind of indicators of bad character which banks look for. They don’t necessarily mean you won’t get a loan – but they do mean that the bank will probably factor in an additional return in the shape of additional interest to compensate for the extra risk.
The kinds of abilities that banks look for are simply those that will ensure that, whatever your plan, you can follow through. Do you have the depth of knowledge of your company’s finances which allows you to understand the impact of the loan on your business? Do you have experience and knowledge of the market you want to expand in? If you don’t, is there someone in the company that does, or are you planning to bring in expertise from outside?
One way of looking at means is simply financial: how much are you worth, and can you realistically support the loan you’re asking for? In other words, will you have the means to actually pay back what you want to borrow – or are you stretching your business too far?
Plan thoroughly
The “P” in CAMPARI is perhaps the most often missed out by business. You’re looking to borrow money for a purpose, not just for fun – so the bank will want to see what you plan to do with it. And under-planning is a sure-fire way of being turned down.
For example, suppose you wish to borrow money to buy an additional piece of equipment which will let you expand production. Walk into a bank and simply ask for the loan like that, and it’s unlikely you’ll be walking out with a smile on your face. Instead, the bank will want to know the details: what are you buying, how much it will allow you to increase production, whether you have orders to justify it, and even how much the capital will depreciate.
They’ll also want to know details of the market: in tough times, can you justify expanding production? Will you have an expensive piece of equipment standing idle in six months time? And what will the impact be on your business – will, for example, there be increased staffing costs associated with the new equipment?
The more detail you can provide, the easier you will make your bank’s job. Not only does having the details mastered show that there’s a justifiable business case for what you want to do, but it shows that you have the ability to run your business and ultimately make it profitable.
Amount and insurance
The more that you’re willing to share the risk of a loan, the more confidence that the bank will have in your seriousness. If you go into a bank and ask for 100% of the amount you need to buy something, for example, you’re much less likely to get the money than if you’re asking for 80% and putting in the rest of the money yourself.
But a second point about the amount is perhaps more surprising: Are you actually asking for enough money to see the project through? The bank has an obvious interest in ensuring that your project is successful, and under-financing is a potentially massive roadblock on that. They would actually rather lend you more money and make it work than less and see your business fail – after all, if the project fails they won’t get all their money back.
And that aspect of getting the money back sums up the final letter of the acronym: Insurance. Not only does this mean having a solid case that you’ll make the payments: it means showing what you would do to cover the risk should you miss them. For example, if you already owe significant money to HMRC, the bank knows that it won’t be first in the queue should your business fail – so may be more reluctant to lend you the money.
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