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When prepping your SME customer to apply for funding, first ask them the right questions.
It’s an exciting time when your SME client reaches the growth stage of their business. With more customers and cash coming in and profitability taking off, they’re starting to see the dream come true.
The business demands that come with this stage of their development mean they’re going to need funding sooner or later. Some may recognise the need to borrow but be resistant to taking on debt, while others may be impatient to take their business forward, and ready to put it all on black.
As their trusted adviser, you can start a conversation to determine what’s going to be needed to support the future of their business.
“Ask your client a few straightforward questions. These should generate answers that will help you (and them) get some clarity on where the business is heading. Then you can help them navigate the process for the best chance at securing funding,” says Andy Walker, Senior Business Development Manager at Banjo.
A classic question is, ‘what’s keeping you up at night about the business’? From there, move on to
1. What's your current situation?
2. What are your goals?
3. How are you going to get there?
4. How are you going to fund it?
If they have a business that relies on seasonal revenue, the answer could be working capital funding to allow them to cover normal operating expenses in the off-season when cash flow is low. Alternatively, they could be a candidate for asset finance if they’re looking for extra resources to fulfil a large contract or major project.
Some SMEs may have other sources of funding, from family to private investors. Others may recognise they probably need to reach out to a lender but are wary because of preconceived ideas or a previous experience. Try to get an understanding of what’s making them gun-shy.
Non-bank lenders like Banjo will primarily base their decision on the data and assets produced by the business, rather than requiring security for the loan in the form of personal, non business related property. A General Security Agreement (GSA) provides protection for both the SME and the lender. It creates a separation between a client's business and their personal assets (such as their family home) by prioritising the use of business assets to recover funds first in case of a loan default, ensuring better protection for both parties involved.
Once you’ve determined the appetite for funding, sit down with the client and go through:
- how much they can afford to borrow
- which funding option is most suitable – from working capital to asset finance, and everything in between
- how current is their financial data
- whether all their statutory payments (eg tax) are up to date
- what information the lender is going to need
- what they can afford in loan repayments, and what is the true cost of funds.
- their back-up strategy if things don’t go according to plan.
Andy Walker explains, “Understand what information the lender you’re applying to is going to need. They’ll want to know where the business has come from, and where it’s heading. The three main sources of this information will be the profit and loss statement, the balance sheet, and the business plan or forecast.”
“Start by generating the P & L and the balance sheet from the business’ accounting software, and go from there. How profitable are they? What’s the cash flow like?”
“It’s critical not only that the content is bang up to date, but also that the SME owner is across the numbers. The key reason loan applications fail is that the business owner doesn’t have a firm grasp of their numbers, and hasn’t provided the key pieces of information,” says Andy.
Ideally, you’ll have planning sessions with the client at least on an annual basis. Your expertise and the discipline of those meetings can be a focus point to anticipate future funding needs.
“The spreadsheet is your friend – make sure the business is continually forecasting. Are they going to need finance, and how are they going to spend it?”
“Prepare a cashflow forecast that includes any loan repayments. Try online resources like the Banjo cashflow forecasting tool,” suggests Andy.
Many brokers will know that obtaining enough data and information can sometimes be a friction point if the client is impatient or time poor.
“Never shy away from asking for the correct data, because that’s what gives your client the best chance of securing funding. You’re in a position of authority and knowledge, so sit them down and gently push them to cut through to what matters – the numbers.”
And in terms of which numbers count the most, Andy sums it up in nine words. “Revenue is vanity, profits are reality, and cash is king.”
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