Introduction
SME finance is a growing area of interest for both businesses and banks. This guide will help you understand how banks make decisions about SME loans, and give you advice on how to get the most out of your application.
The importance of SME finance
Small and medium-sized enterprises (SMEs) are the backbone of many economies worldwide. They are responsible for a significant proportion of job creation, innovation, productivity and growth in developed countries such as the UK. In fact, SMEs account for 97% of UK businesses, so it’s no wonder that they make up around half of the country’s gross domestic product (GDP).
As you can see, there is no doubt that small businesses have a huge role to play in improving economies – but how do they get their hands on some much-needed capital? It comes as no surprise that banks are often seen as being inaccessible to most SMEs due to strict lending criteria or lack of knowledge about how bank loans work. But technology is changing everything! Nowadays online platforms like Crowd2Fund exist where lenders can fund promising young businesses through our unique ecosystem which allows potential borrowers to showcase their business ideas while collecting funds from multiple investors at once – giving everyone involved access to better deals with lower interest rates than traditional forms of finance like banks might offer them (or not!).
Applying for a business loan
If you're thinking about applying for a loan and want to know what to expect from the process, here are some things you should know:
· Prepare for your meeting with the bank. First, research the institution in advance and make sure it fits with your business needs. Make a list of questions that need answering before submitting an application. If possible, bring along any supporting documents or evidence that will help strengthen your case (e.g., financial reports).
· Be prepared to answer questions about how much money you need as well as why exactly and how it will be used. Banks like knowing that their clients will use their money responsibly—for example, by paying off existing debts first—and only when necessary should they lend more capital than what's appropriate for running daily operations (i.e., investment growth).
Is your business ready for a loan?
Your business should be able to meet the following criteria before applying for a loan:
· Have a clear business plan. A bank will want to see that you have thought things through and worked out exactly what you're trying to achieve. A good business plan will include how much money your company needs, why it needs the funds, and how long it will take for you to pay back the loan.
· Have a good credit history. Banks want to know that you've been paying all of your bills on time in the past, since this shows that you're reliable and responsible with money. It's also helpful if you already have an existing relationship with them so they can see what kind of person they'll be lending money to—but even if this isn't possible (for example if it's your first start-up), there is still hope!
· Be prepared for tough questions about past earnings/income streams (if applicable), assets owned by yourself or family members who are involved in running the business (if applicable) - make sure everything looks legitimate before hand because banks have strict rules when it comes down these areas regarding income/assets earned during last six months etc."
How banks decide on loans
Banks and other lenders use a number of considerations to determine whether to extend a loan to you. They look at several factors, such as:
· The nature of your business. The more established your company is, the better chance it has of receiving financing.
· Your personal financial situation. If you have a good credit score and no outstanding debts, banks will be more willing to lend money.
· Existing debt obligations from other loans or lines of credit (if any). If there are no existing loans or lines of credit, then banks may be more inclined to give you additional money now because they won't have to worry about collecting payments in the future—and if the economy gets worse, those loans will be easier for them to collect on than if they were taken out years ago when times were good!
Conclusion
If you’re a business owner looking to expand your operations, SME finance should be top of mind. With the right degree of preparation and careful planning, you can be well on your way to accessing the capital needed to grow your business. While it may seem like an intimidating process at first, making sure that you have all of the necessary paperwork and information ready will help streamline things significantly.
