How to Prepare a Business Loan Application

Nobody approves a business loan on the strength of a good meeting with your banker. Someone writes a credit paper — a few pages that set out the request, the business, the numbers, the risks and a recommendation — and someone who has never met you approves or declines it. Everything you send is raw material for that paper.

That changes what a good application is. It is not the thickest pack or the most polished deck. It is the one that answers the paper's questions in the paper's order, so the person writing it spends their time on judgment rather than on chasing documents — and so the version of your business that reaches the approver is the one you would have written yourself. The guide to writing a credit paper shows the same paper from the writer's side.

Before any document, one paragraph: how much, for what, repaid from where, over what term, against what security. It goes first because everything underneath is read against it — the same set of accounts can support one request and not another, and a reader who does not know the request cannot tell which.

The paragraph is also the first thing that separates borrowers. In Issue 04, Highview Industries asks to lift its working capital revolver from US$2.5m to US$4.0m. The same request can be written two ways:

“We would like to increase our working capital facility to US$4.0m to support our growth.”

“Sales have grown from US$28.0m to US$38.0m in two years on an unchanged cash cycle of about 66 days. At that cycle the extra US$10.0m of sales ties up about US$1.8m of working capital. We are asking for US$1.5m, repaid from collections as the cycle turns; the new capacity was funded separately, by the term loan that is already amortising.”

The first version asks the bank to work out whether the number is right. The second has already done it, and says where the money for the machines came from before anyone has to ask. Both borrowers might be approved. Only one of them has told the bank, in its own words, that it knows how its business uses cash — which is what the drill's reading finds before it has opened the file.

Lenders ask for much the same documents, because each one answers a question the paper must answer. Sending them with that question in mind is the difference between a pack and a pile.

Two habits make the list work. Send the documents together, labelled, with the period each one covers — a pack that arrives in five emails over three weeks is read five times. And make the numbers agree with each other: management accounts that cannot be reconciled to the annual accounts, or a debt schedule that does not match the balance sheet, turn a reading into an investigation.

The forecast is where the bank sees how its money comes back, so build it from the things the bank will test: sales split into volume and price, a margin you have actually achieved before, overheads that step up when the business does, working capital that follows the forecast sales at your own cycle rather than a straight line, capital spending split into keeping-up and growth, then tax, drawings and the loan repayments themselves. Write the assumptions down beside the numbers.

Then add the case where things go worse — sales flat, a customer lost, a margin squeezed — and say what you would do in it. The bank will run its own version whether you do or not. A borrower who has already run it, and knows which lever they would pull, is having a different conversation from one who is seeing it for the first time across the table.

Bring your last forecast too. The first thing a lender tests is not this forecast but the previous one — what you said last time against what happened — and a variance you explain before you are asked is worth more than a new spreadsheet. The guide to how banks test forecasts sets out the order they do it in.

Every application has something in it the owner would rather not discuss: a customer lost, stock that did not sell, a quarter that went backwards, a dispute. The bank will find most of it — in the aged debtors, the management accounts, the security search. Found by the bank, it reads as something you hid. Raised by you, in writing, with the number and what you are doing about it, the same fact reads as management that knows its own business, which is one of the things the paper has to judge.

Issue 06 shows what happens when a request carries its bad news inside it. Kowhai Retail Group asks to lift its seasonal line from US$2.0m to US$3.5m with US$1.1m of last season's stock still unsold and this year's buy up 22%. The reading finds that part of the seasonal uplift is not seasonal at all: it is the unsold past, asking to be refinanced under the season's name. A borrower who had split the two numbers first — this much for the new season, this much for last year's stock, and here is how that stock clears — would have been asking a different, and easier, question.

How a bank reads the person behind the numbers is the subject of the guide to management quality: it is a record built up over time, and the application is the first entry in it.

The pack goes to your banker, and usually to an analyst who puts the numbers into the bank's own format. Then questions come back. Each question tells you what the file is being read against — a question about debtor days means the working capital is being tested, a question about a related company means the bank is tracing who else relies on your cash — so answer it once, in writing and completely. A partial answer brings the same question back a week later.

You are entitled to ask how long it will take and what else the bank needs. Some banking codes write that down: Australia's commits its banks to tell a small-business applicant what information they need and how long a decision is likely to take, and to give the general reason if they decline.

The paper then goes to whoever holds the authority to approve it: a senior credit officer, or a committee for larger requests. What comes back is an offer with conditions. Read the conditions as carefully as the price — the covenants in them are the tests you will be measured against for the life of the facility, and the covenants guide explains what each one measures. If the answer is no, the guide to a declined application explains which kind of no it was, and what it usually needs to become a yes.