How do I prepare for bank lending?

To prepare for bank lending, clean up your latest accounts, build a credible twelve to twenty four month forecast, write a short proposal explaining what the money is for and how it will be repaid, understand the ratios the bank will test, and be ready to discuss security and personal guarantees.

Banks lend to businesses that can demonstrate they know their own numbers. The preparation matters far more than the pitch.

What banks actually look for

Banks are not looking for a perfect business. They are looking for a business that understands itself, has thought about risk, and can evidence how the loan gets repaid. The old framework still holds, and lenders assess five things.

• Character. The track record and credibility of the management team.
• Capacity. The ability of the business to service the debt out of cash.
• Capital. The equity the owners have already committed.
• Collateral. Security available against the loan.
• Conditions. The sector, the wider economy, and the specific circumstances of the deal.

A strong application speaks to each of them. A weak one concentrates on the pitch and skips the numbers.

The document pack you will need

Assume the bank wants all of the following. Having it ready before the first conversation makes the process faster and says something about how the business is run.

Historic financials. Three years of year end accounts. Management accounts no more than a month old. Aged debtor and creditor listings. Recent VAT returns. Bank statements for the last six to twelve months.

Forward looking information. A twelve to twenty four month forecast covering profit and loss, balance sheet and cash. A rolling thirteen week cash view showing short term liquidity. The assumptions behind the forecast, written down. A sensitivity analysis on the key drivers.

Business context. A short lending proposal of two to four pages. An overview of ownership, key people and customers. Supporting information on any major contract, new premises or asset being financed.

The quality of this pack signals the quality of the business. A well organised pack is not decoration. It is evidence.

The ratios banks will test

Banks model your business through a handful of ratios. You should know where you sit before they do.

Ratio	What it measures	Typical threshold
Debt service cover	Cash available to service debt, against debt repayments	At least 1.25 times, often 1.5
Interest cover	Operating profit against interest payable	At least 3 times
Gearing	Total debt against shareholder equity	Usually under 2 times for an SME
Loan to value	Loan against the value of the asset secured	60 to 75 per cent for property, lower for other assets
Current ratio	Current assets against current liabilities	Comfortably above 1

These vary by bank, by sector and by loan type. The specific numbers matter less than knowing your position. If a ratio is weak, a good proposal explains why and what you are doing about it.

Writing the lending proposal

Two to four pages is enough, and longer proposals lose the reader. A structure that works:

1. The business, the managing director, and the purpose of the loan, in one paragraph.
2. The opportunity or the need, and what happens if the funding does not arrive.
3. Use of funds, specifically, in numbers.
4. The repayment plan, referenced back to the forecast.
5. Security offered, and the loan to value position.
6. Three or four honest risks, each with a short mitigation.
7. Appendices: forecast, historic accounts, supporting schedules.

The best proposals read as though a finance professional wrote them for another finance professional. Plain, specific and confident, with no marketing language anywhere near them.

Personal guarantees and security

Most SME lending comes with security over a business asset, a personal guarantee from the directors, or both. The honest version:

Business security usually sits as a debenture or a fixed charge over property, equipment or the debtor book.

Personal guarantees are a standard feature of SME lending. One does not automatically put your house at risk, but it does expose personal wealth if the business cannot repay. Negotiate the size, any cap, and whether it can be insured.

For loans above a meaningful size, personal guarantee insurance is worth looking at. It limits the personal downside and costs a fraction of the interest.

Never sign a personal guarantee without legal advice. The detail matters.

Why applications fail

Most declines come down to a small set of recurring problems.

• Late or unreliable management accounts. If the bank cannot see a consistent picture, it assumes the worst.
• A forecast that does not tie to the historic numbers. One that implies margins the business has never achieved will not be believed.
• Vague use of funds. Working capital means nothing. Funding the working capital tied up in a new contract worth £2.4m over twenty four months means something.
• A repayment plan that only works in the good case.
• Unexplained losses or covenant breaches in the historic accounts. Silence looks worse than a clear explanation.
• No senior finance input. Banks respond better to a conversation with a finance director than to a managing director handling the numbers alone.

What good preparation looks like

Businesses that get funded have usually spent six to eight weeks preparing before they approach anybody.

Weeks one and two, clean up the management accounts and resolve anything odd. Weeks two to four, build the forecast, stress test it and write down the assumptions. Weeks four to five, write the proposal. Weeks five to six, review the ratios and prepare a clear narrative for the weak ones. Week six onward, approach two or three lenders in parallel, because competitive tension gets better terms.

Approaching a bank cold with last year's accounts and a rough cash forecast is unlikely to get the terms you want, even if the deal gets done.

Choosing which banks to approach

Your existing bank is not automatically the best option. Relationship matters, but pricing and appetite vary a great deal between lenders, so always approach at least two others.

Challenger banks and specialist lenders often have more appetite for particular sectors or deal types than the high street, though they can be slower.

Asset finance and invoice finance sit outside traditional term lending and are sometimes a better fit. An experienced finance director will know which tool suits which job.

Common questions

How long does bank lending take? Four to eight weeks for a straightforward term loan, from first conversation to funds drawn. Asset and invoice finance move faster. Property backed lending takes longer because of valuation and legals.

What is a debt service cover ratio? It measures the cash the business generates against the debt repayments it has to make. At 1.5 times, the business generates fifty per cent more cash than it needs to service the loan. Most banks want at least 1.25 times.

Will the bank want a personal guarantee? For almost all SME lending, yes. Size, cap and terms are negotiable. Existence usually is not.

What makes a forecast credible? It ties to historic performance, the assumptions are written down, and there is a downside case. A forecast that only works in the upside is not a forecast.

What if last year was a loss? Explain it, evidence the recovery, and be ready to say what changed. Banks lend to businesses that have had a bad year and understand why. They do not lend to businesses that look surprised by their own numbers.

How we help

We prepare firms for lending conversations. That means cleaning up the management accounts, building the forecast, writing the proposal, briefing the managing director beforehand, and sitting in the meeting where it helps.

The preparation is where the outcome is decided. If you are planning a funding conversation in the next six months, the work starts now.