Business: Maximize your chances of getting a loan

Bank financing is essential for the development of your business. To benefit from it, your bank will analyse your activity and financial statements in detail. It needs to assess the risks and make sure you will be able to repay it. Which elements will be examined and how can you best prepare your application? myLIFE gives you some advice to optimize your loan request.*

Owner of a decoration shop, Melissa would like to redesign her store and rethink her sales concept by offering her customers a “café-relaxation” area. To bring her project to life and design this café corner, she plans to change the layout of the sales areas, hire an additional person, find new suppliers, and refine her communication strategy. According to her initial estimates, this will require remodelling work (floors, painting, partitions, plumbing, etc.) as well as the purchase of equipment (counter, tables, armchairs, dishes, professional coffee machine, refrigerator, etc.). She will also need to adapt her website, create a menu for drinks, etc.

She decides to go see her banker to present her project and request a helping hand for the financing of this beautiful project. Even though Melissa gets along quite well with her relationship manager, she would like to maximize her chances for her request to be accepted.

She already knows that several elements will be reviewed: the business plan for her project, the company’s figures, her self-financing capacity, the guarantees she can offer, etc. To help Robin best prepare her credit application file, let’s review the main evaluation criteria that will be examined.

1. The company and the history of the banking relationship

First of all, the bank needs to have a good understanding of the company: its legal status, its sector of activity, the profile and professional experience of its manager, the number of partners, its clients, suppliers, etc. The aim is to ensure the viability of the business.

In Melissa’s situation, this step should be quick. Her banker and she have known each other for several years. Their relationship began when the Relationship manager supported her at the launch of her business, and Melissa has always demonstrated seriousness in managing her financial obligations.

Nevertheless, her banker will check the history of their banking relationship: proper cash management, respect for deadlines, any outstanding payments, quality of interactions, etc. This confirms Melissa’s reliability and the sound management of her company.

Although the conditions for granting a loan vary from one institution to another, they also depend on the trust relationship between the bank and its client.

Although the conditions for granting a loan vary from one institution to another, they also depend on the trust relationship between the bank and its client. Even if Melissa’s banker is not the only one to decide whether to grant the loan, the good relationship between the two parties will weigh positively when the banker defends Melissa’s application before the bank’s credit committee.

=> Ahead of her application and in anticipation of these checks, Melissa can make sure to manage her accounts carefully. Maintaining a regular flow of activity, not exceeding overdraft limits, and avoiding payment incidents are all indicators that work in her favour.

2. The project and the business plan

Melissa will have to explain the project to her bank advisor and submit a detailed business plan. She must convince him of the value of her idea by presenting her strategic objectives and the action plan to be implemented. This document is also where she will estimate her financial needs, resources, and projected results. She can also present a market study, as well as a SWOT analysis of her new concept. This document will allow the bank to assess the feasibility and economic viability of his project. Melissa must ensure she remains clear, structured, and concise so that the elements in her file are well understood.

=> Melissa can be inspired by a standard business plan structure to prepare her document and, if necessary, seek advice from specialists, for example by contacting the House of Entrepreneurship or the Chamber of Trades.

The bank will closely examine the financial health of Melissa’s company and the evolution of its results over recent fiscal years.

3. The company’s financial health

Before granting financing, the bank will closely examine the financial health of Melissa’s company and the evolution of its results over recent fiscal years. This analysis allows the bank to assess the level of risk associated with the loan application and to ensure that the business will be able to generate sufficient income to guarantee repayment of the loan.

To make its decision and define the characteristics of the loan (amount, duration, rate, guarantees, etc.), the bank will calculate and analyse various financial indicators:

> Turnover (revenue): This is one of the first indicators analysed. It reflects the evolution of the company’s economic activity level. The bank will study the balance sheets and income statements from recent years. Depending on the nature of the project, it will also need a forecast of the expected turnover.

> Self-financing capacity (CAF): This evaluates the company’s ability to generate financial resources through its operations, without seeking external financing. It allows estimation of profitability and the level of cash flow that can be allocated to loan repayments. CAF is also used to calculate the company’s repayment capacity.

> Debt ratio: This compares the company’s financial debts to its equity. This indicator helps assess the company’s solvency and determine if it can support a new loan.

> Working capital requirements (WCR): The banker will study the amount of liquidity Melissa needs (before receiving income) to cover current expenses and ensure the smooth operation of her business: stocking inventory, paying suppliers, paying employees’ salaries, etc.

> Gross operating surplus (EBE): This determines the gross wealth produced by the company over a given period (without considering its financing policy, depreciation, or exceptional expenses). It provides information on the company’s economic profitability and operational performance.

=> Putting together a loan application file is a demanding exercise that requires rigor and attention to detail. Melissa should not hesitate to seek help from an expert, such as her accountant, to clearly and convincingly present the company’s financial situation.

The greater the personal financial investment, the more it demonstrates the entrepreneur’s commitment.

4. Personal financial investment

Personal contributions and equity (the company’s own capital) injected into the project also play a role in the decision to grant the loan or not, especially when it comes to starting a business. The greater the personal financial investment, the more it demonstrates the entrepreneur’s commitment. Furthermore, stronger capital will reduce the risks for the bank, which will improve the chances of obtaining financing.

=> Our shopkeeper should not hesitate to show enthusiasm and confidence in the success of her new shop/café concept. She must prove that she believes in her project to convince and inspire confidence in her banker.

5. Guarantees

To secure the loan, the bank may ask Melissa to provide certain guarantees. These may vary depending on the financing need, the level of risk assessed by the bank, the presence or absence of a personal contribution, the company’s results, etc.

The main guarantees that may be required as part of a professional bank loan are as follows:

> A pledge or collateral on movable property: goods, company equipment, lease rights, securities, shares, etc. In case of default, the financial institution may request to seize the pledged assets.

> A personal guarantee from the company director. In case of non-payment of the monthly instalments, the director will have to reimburse the bank from his or her personal assets.

> A guarantee by a specialized organization, such as the Mutual Guarantee Scheme (Mutualité de Cautionnement) or the Mutual Guarantee Scheme for SMEs (Mutualité des PME) in Luxembourg, for example. These are intended for small and medium-sized enterprises that do not have enough assets to cover the repayment of the debt. In case of payment difficulties, the organization is responsible for repaying the instalments.

> A mortgage in the case of a property purchase. If the company defaults, the bank may seize the property and sell it to cover the debt.

Although they are not systematically required, these guarantees provide reassurance to the banker by offering additional security. This can help positively influence the loan agreement and its terms.

=> In principle, the bank will require Melissa to take out borrower’s insurance. This insurance should not be confused with the guarantee. It covers the bank, but also protects Melissa’s company and her heirs in the event of death, disability, or incapacity.

Melissa now has all the tools she needs to put together a strong loan application file in which she can demonstrate the viability of her project, the financial soundness of her company, and her ability to meet her repayments. She should not hesitate to contact her relationship manager in advance to find out the specific elements required for her internal application. The more complete and carefully prepared her application is, the more she will increase her chances of obtaining financing suited to her project. Good luck to her!

* Content translated from French by the BIL GPT AI tool