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Getting a bank loan

Getting a bank loan for your business used to be a lot more straightforward than it is now. Banks are a lot more risk adverse so you need to make sure you present them with a solid proposal to meet their criteria.

You will learn

  • The key areas of consideration when banks review your application
  • Recent changes to the attitudes of banks
  • How to give banks the confidence they need to lend

The issue

The biggest issue facing small and medium-sized businesses today is their access to funding – or lack of it.

Before the credit crunch, getting a bank loan was relatively easy, but that has all changed now. Banks are extremely cautious and take a huge amount of convincing to lend to businesses.

Bank criteria

Firstly, let me tell you what the banks look at when they review your lending request. It can be broken down in to several key areas, which are:

The people  they look at whether the proprietors are of high integrity, honest, etc., and what their credit history is like. They also look in to their ability – how capable are the main people in the business?

Secondly, the purpose of the loan is an important consideration for them and they will look closely at what the funding is to be used for.

Next, the amount of the loan or overdraft – is it the right amount, or possibly too much for what you really need? Conversely, is the amount sufficient, or will you soon be back for more?

Serviceability – how their loan will be paid back. I will come on to this later.

Banks are very interested in security – how they will they get their money back if things do not work out? 

Finally, last, but by no means least, their profit – banks are not charities and will always want to make sure that their return is right for the level of risk they are taking. 

So, what has changed?

The general criteria that banks use has not really changed, but the emphasis certainly has.

Prior to the credit crunch, banks were overly focused on the amount of security being provided. That has all changed, and this is the key message, the emphasis is now heavily weighted towards the serviceability of the borrowing.

Your bank manager will want to be able to prove, beyond all reasonable doubt, that your business will be able to service the interest and loan repayments; that they will get their money back.

How do you do this?

At RedSky, we put ourselves in the shoes of the lender to ensure that serviceability is in place and that there is strong supporting evidence to this effect.

By doing this, we have found that we have had a high rate of success obtaining business finance for our clients:


There are several things banks look at when considering whether serviceability is in place, and it is often a combination of the following:

Firstly, your accounts will show how profitable your business has been in the past – this is a key factor for them. However, there is a big difference between profit and cash, and the bank will always focus on the latter.

Looking to the future: your forecasts. In particular, your cash flow forecast is very important to your bank manager.

We always spend a great deal of time ensuring that forecasts are as accurate as they can be, supplying robust and very detailed assumptions, with supporting evidence if possible.

Banks also use several ratios for evaluating serviceability, such as:

  • Repayment Cover
  • Interest Cover
  • Rental cover (if a rented property is involved)


Ratio Definitions

Repayment Cover:

Profit Before Tax (after Drawings/Dir Rem/Dividends) plus Depreciation & Interest charges

All annual loan repayments (capital & interest)*

Interest Cover:

Profit Before Tax (after Drawings/Dir Rem/Dividends) plus Depreciation & Interest charges

All annual interest charges*

*On all borrowing

Rental Cover:

Gross rental income less 10 to 15%

Annual loan rep’s (capital & interest at margin plus 4 to 5%)

Minimum acceptable ratios vary depending on the business/industry and the lender involved. Typically, a bank would be looking for the following minimum figures:

Repayment Cover - 1.5 times (150%)

Interest Cover - 2.0 times (200%)

Rental Cover - 1.25 times (125%), but varies greatly from lender to lender.

Want to find out about local funding opportunities?

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Written by:

Peter Beresford

Finance expert

Email Address:

Telephone: 07738 546400