External finance is a useful tool in the remit of businesses. Whether it is filling a financial gap, enabling expansion or keeping your business afloat when times are tough, getting the funding you need is the key to the longevity of your enterprise.
However, securing external finance is no small feat. Lenders deal with countless applications for business loans daily and, although the lending market is more capable than ever, it simply isn’t possible for everyone to be accepted.
So, when it’s your turn, you need to make sure you are fulfilling the criteria and giving yourself the best chances of success. This means preparing in advance – but what should you be preparing for?
Lenders will assess businesses in several ways to determine how eligible they are for a loan. Sometimes, this won’t be as simple as a tick-box exercise: you need to demonstrate the value you offer, as well as your reliability, to convince your audience that you are worth the money.
In this blog, we have outlined the ways that a lender may assess you so you can get your application in the best possible shape – and increase your chances of success.
- The CAMPARI model
- Your credit score
- Supporting evidence
- Realistic models and timescales
- Tips for success
The CAMPARI model
As we have already mentioned, there are many factors a lender could use to assess your business ahead of offering finance. These factors are underpinned in the CAMPARI model, an assessment model used by lenders to determine your suitability for funding. This acronym stands for character, ability, means, purpose, amount, repayment and insurance.
Funders will want to know whether you are personally capable of starting and growing your business. They’ll do some background checks on you for such things as a criminal record as part of their ‘character’ research, as well as taking into account your personal financial history, such as any cases of bankruptcy and insolvency. This will tell them whether they should have confidence in you, as an individual, in running and growing an enterprise.
Next is your ‘ability’. This is how you plan to achieve your intended results and continue to run a successful business over time. Usually, this will be showcased in your business model, and some applications may ask you specific questions regarding this. By doing this well, you should convince the lender that you understand your market and allow them to buy-in to your idea.
‘Means’ is associated with how you will handle your funds if you are accepted for a loan. Lenders don’t give out money for the fun of it: they want to be sure that you will take a loan and convert it into desirable results for your business. This will also increase your likelihood of repaying the loan on time. This may be graded on things like your trading history and revenue.
The ‘purpose’ element is fixated on why you need funding. Many applications will ask you to answer this to make sure that the loan will be used for genuine and sensible reasons. Again, this will form part of your business plan. Focus on the results you expect to see from getting the funding – for example, if you are putting it towards growth, how may that impact your sales and profit?
As you may expect, ‘amount’ is how much you wish to apply for. This number shouldn’t be plucked out of thin air: you will be expected to validate it through your financial forecasting and planning. Lenders will determine if you have asked for a sufficient amount (as well as whether you’re worth it). If you ask for too much, it could be a red flag that you haven’t undertaken your research or that you might be using it for other purposes.
‘Repayment’ is the next part of the model. Every lender wants to get their money back, on time, and with interest – so they need to be confident in your ability to do so. This is where your financial history may be considered, as well as any cash flow projections you have. A reputable lender will also not want to put a strain on your business, so if they feel you won’t be able to keep up with the repayment plan, they are unlikely to accept you for finance.
Finally, we have ‘insurance’. Lending is a high-risk game, so anyone offering a loan will naturally want to be assured that they will receive their money back and having insurance in place will help to assuage their concerns. They’ll want to know that you have collateral to back up your loans, such as assets or a personal guarantee, which can be used as security.
These seven factors will be the determiners of whether your application receives a ‘yes’ or ‘no’, so it’s essential to have the right answers and documentation ready for each.
Your credit score
In truth, many people don’t know what credit scoring means. According to a survey carried out for credit checking agency Experian, only 13% of directors of SMEs could identify the key factors that affect their credit ratings. Over half of small businesses surveyed never even checked their credit ratings.
Knowing your credit rating is important because banks will use this information when you apply for funding in the form of a loan or credit card. They’ll ask credit reference agencies to check how reliable you have been at managing loans and making repayments, to mitigate their risk and calculate their rates. So, your credit score can be linked to the ‘character’, ‘means’ and ‘repayment’ parts of the CAMPARI model.
Having a strong credit rating is essential for many reasons, not least because it’ll help you get funding, and can also help you win tenders and negotiate business contracts. Without a favourable credit score, you will find the external financing mission becomes much more difficult.
If your credit score needs a boost, there are some tips you should follow to help you build it.
Supporting evidence
As part of the application process, many lenders will ask you to supply supporting documentation that demonstrates the value of your enterprise as the recipient of a loan. This evidence should support the criteria of the CAMPARI model, outlining exactly what it is you need and providing the rhyme and reason behind it.
The most substantial documentation you can provide will be via your business plan. This should be carefully crafted to answer the questions a lender will be asking about you while shining a favourable light on your business at all times. You can find out how to create a winning plan here.
Other supporting evidence that may be provided, either as part of your business plan or additionally, include financial statements, forecasts and projections, market research and so on. Some applications may ask for specific documents that you need to provide, or they may simply ask you to provide anything you think is useful. If it’s the latter, only send across critical information that demonstrates your worth – lenders won’t welcome endless files for no reason!
Make sure that any documentation you do provide is accurate, consistent and well-presented to boost your chances as much as possible and leave no room for error.
Realistic models and timescales
Starting a new business or growing your existing one is an exciting time, so it’s understandable that people get carried away. But you need to be sure you can grow your business in a sustainable way. Moreover, you need to convince the lender of this.
Funders and investors will want to see how you propose to grow your business over the long term and how you plan to manage that growth. It’s crucial that you remain grounded and have a solid plan in place.
Don’t just pick figures out of the air. Base your models and forecasts on historical data if you are growing an existing business. If you’re a start-up, you must base your financial models and timescales on research of your markets using stated assumptions. But be prepared to be challenged on them, and have your justifications ready when needed.
This focus should underpin every part of the application process, including any documentation you submit. While you will naturally want to please lenders and give yourself the best shot at success, it is vital that you remain truthful at all times and don’t look at things through rose-tinted glasses. Lenders will see through this, causing more harm than help to your chances.
Tips for success
We know that being assessed in any scenario is scary, and none more so than when that assessment is what lies between you and substantial funding. We’ve summarised our top tips to help you achieve success in your efforts.
- Understand what the lender is looking for and embed this into your application.
- Remember to be honest at all times. A lender may overlook a previous mistake or risk factor, but they’re unlikely to forgive a fraudulent claim.
- Create a business plan in advance that contains the relevant information and is watertight. Be prepared to revisit this plan over time and adjust it in line with feedback or the specific requirements of the lender.
- Utilise your data where possible to give accurate projections of your business and its future results – such as keeping track of your accounts, profit levels and so on.
- Be aware of your credit score and take the appropriate steps to improve it if needed.
- Remember, your business plan is unique to you – you can use templates for guidance, but don’t be afraid to adapt it.
- Know that one rejection doesn’t mean that every lender will reject you, and be prepared to learn lessons to support your future efforts.
Get advice
By understanding what lenders want and how they will assess you, you are well-equipped to create an application that meets the criteria and brings them into the vision of your business. This will empower you to secure the funding you require and put you on track to achieve your goals.
If you need support in filling out an application for a loan or creating a business plan, we are here to help. Our team of advisors have experience working with companies of every shape and size to realise their funding ambitions. We can also help you determine which loans are suitable for your needs before you start applying.