Using a Commercial Finance Broker
What is a commercial finance broker?
A commercial finance broker is someone who helps businesses or individuals (most commonly small to medium enterprises) source finance for any number of reasons. Commercial finance brokers essentially connect commercial finance lenders with those that need commercial finance.
Why Use a Commercial Finance Broker?
When it comes to commercial finance, looking for the right deal can cost you time and money. Using a commercial finance broker is similar to using any other kind of broker. It saves you time, money and effort.
Using a commercial finance broker gives you access to a much wider range of suppliers in the market. As an individual, looking through and applying to each lender in turn is like getting a price from one shop at a time. By using a commercial finance broker, you get all the prices in the shopping center in one go.
Advantages of using a commercial finance broker
There are many advantages to using a commercial finance broker. Each bank or financial institution has different lending criteria. They each have their own rules and regulations which govern why they lend to, how much they lend, the terms of the loan, the length of payment, how much they charge and so on.
Commercial finance brokers know these rules and regulations. They know exactly what each bank is looking for and which banks will give the best price or are the most likely to lend etc.
Commercial finance brokers know how each bank what the deal or application to be packaged. They know what boxes need to be ticked and points need to be covered. This means that using a commercial finance broker can make your application far likelier to get the deal you want.
Finance brokers have an ongoing relationship with lenders. Most commercial finance brokers have been in the industry for a long time and have, therefore, built up a considerable network of contacts in the industry.
They continually supply the lenders with business and, therefore, have more leeway to negotiate deal terms such as rates. Commercial finance brokers can usually get you a better deal than if you walk into a bank yourself.
What do I need to raise finance?
What business experience do I need to raise finance?
You may be very qualified in your own field, but what business experience do banks and other lenders like to see before they will provide funds?
Lenders need to know that their investment is in good hands. This means that they need to know that the person running the business to which they are lending has the acumen to actually do so.
Banks will be looking for experience in your trade, not just business experience. For instance, if you are a dentist of 10 years this looks very good to a lender as you have a wealth of experience in your field. However, they are also looking for evidence of ability to manage staff, prepare cash flows, manage accounts etc.
Lenders like to see some level of business experience and ability in those to whom they lend. This does not mean that first-time business owners cannot borrow money. If you do not have a wealth of experience in business matters, it is a good idea to make a note and provide evidence for the business experience you do have. For instance, any experience you may have with dealing with HR or staffing issues.
How do banks assess your business?
When banks assess whether to lend you commercial finance or not, they look at the company’s EBITDA. This is the Earnings Before Interest, Tax, Depreciation and Amortization.
This is the true profit of the company, the money that would be available to you at the end of the day. It is important that EBITDA covers both your own costs and the bank’s loan payments. Preferably with a healthy margin left over.
When banks assess you as a business owner, they are going to scrutinise a number of different aspects of your life. For instance:
- Your employment history and your earnings in your field.
- Evidence of good management of your personal finances.
- Your living situation – whether you are renting or a home owner.
- Management experience in your occupational field.
- Evidence that you are able to pay back loans in full and on time.
- Your personal savings situation and how efficient you are at saving and investing money.
- Evidence that your personal tax payments are up to date.
There are many more factors that will be considered, this is not an exhaustive list. It is important to understand, however, that banks will not just be looking at the history and situation of the business itself. You will also be under the microscope.
What information do lenders need?
Banks and other financial lenders need to see a large amount of information, paperwork and data before they will consider lending money. They will need to see documents such as your CV so as to check your history, qualifications, experience etc.
They will also need to see the last 3 years’ accounts or your SA302 so they can see what you’ve earned and what business you have done in the past. This gives them a clue as to what volume of business you can do in the future. They will require details of the terms of any lease the business has, as well as its assets.
It is important to have a business plan with 3 years’ projections. This shows the lenders what your plans and predictions are for the future of the business and, therefore, their money.
It is important to make sure all of the required information is provided in one package on time and, most importantly, accurately. Commercial Finance Brokers can ensure that this happens as they have a lot of experience producing this information for lenders on a regular basis.
When to apply for finance from a lender.
It is important to begin your application as early as possible. There will, in most cases, be inevitable delays. So, it is important to get the ball rolling early so as to not miss any important deadlines.
It is advisable to begin planning for borrowing money for your business more than 12 months in advance. Banks will scrutinise your documents covering the previous 6 – 12 months. Make sure that all your financial documentation is accurate and up-to-date.
This is where a commercial finance broker can be really advantageous. They know exactly how deals are supposed to be packaged, and exactly what banks are looking for. They will be able to ensure that your application has the greatest chance of success.
It is important that the bank can see from your applications that you have a good history of making debt payments on time, as well as a strong credit score. You should also be able to show the bank that you have a team of the right professionals in place. These professionals range from experts in your field, to dedicated accountants and solicitors.
Lastly, understand exactly what kind of financing is best for you and your business. Financial institutions offer a range of funding options and it is essential you understand exactly which one best suits your business needs.
What does my business plan need?
A well-written and accurate business plan is essential when it comes to raising finance for your business. Lenders need to see clear and realistic predictions for the future of the business, as well as your personal plans for its direction. They also need an accurate reflection of the current state of the business.
The business plan should cover all aspects of the business. This includes:
- Aims and objectives of the business
- Services or products that are available
- Information about the market and competitors
- Costs of purchasing and running the business
- How the business is going to be run
- Financial forecasts
A business plan should have 3 major sections. These are; the executive summary, the narrative and the financials. There should also be included at the end appendices with relevant graphs and charts.
The Executive Summary.
Banks and other lenders need to know important aspects about the business before they will risk lending money to it. The executive summary provides this information by detailing the key points that are made in the business plan, as well as key facts and figures.
You should include your vision for the business and a summary of your goals and strategy. Details of the services and products provided, financial history and requirements and brief projections are essential.
The executive summary needs to be clear, concise and above all, persuasive. You need to outline why your business is a safe option for the lender’s money,
The main body of your business plan should be broken down into 3 seperate parts. These parts should include:
- An overview of your business. You should include things such as loan payments and risk management, staffing and structure.
- The location of the business. Include information such as public transport links, lease details and anything that pertains to the success of the business.
- Marketing and analytics. Detail your target demographics and how you intend to reach them. Include details of your marketing strategy such as platforms you will use and the budget you have set aside. Make sure to include your market research.
- Operation of the business. Discuss how the business will be run on a day-to-day basis. List the equipment and staff that will be required to perform, as well as what supplies and how frequently they will be needed. Discuss staffing requirements and structure.
You should detail the financial situation of the business in the final section. You should include your facts and figures such as the current and projected income of the business.
You should also include your cash flow figures and make sure to detail any assumptions you have based these predictions on.
In the appendices, you should include your supporting evidence and background information for the claims you have made about the current financial situation and any predictions. The appendices are made up of charts, graphs, graphics, plans and schedules.
See how much you can raise
Follow us on Facebook to keep up to date on all our articles and videos on acquisition finance and more.