Business plan for a bank loan: what UK lenders check

The short answer. A UK lender reads a business plan for five things: what the money is for, whether the business's cash can repay it with room to spare, what happens if trading is worse than planned, whether the plan agrees with your accounts and bank statements, and who is running the business. If the plan and the numbers disagree anywhere, the rest is not read.

1. What the money is for

The first page should say how much you want, what it buys and how that makes money. "£60,000 for a second van and two staff, to take on the council contract we have been offered" is a purpose. "Working capital to support growth" is not. The credit team also wants to see what you are putting in yourself. A business asking the bank to carry all of the risk is a harder yes.

2. Can the cash repay it, with room to spare?

Banks lend against cash flow, not profit. They take the cash the business generates after tax and after what the owners draw, and compare it with the loan repayments. They want a clear margin above the repayments, not a forecast that just covers them. Show the repayments as a line in a monthly business cash flow forecast, from the month after the money arrives, with VAT, PAYE and corporation tax in the months they are actually paid. A plan with annual figures only cannot show this.

3. What happens if it goes worse?

Every lender assumes your forecast is optimistic, because most are. Show them you have thought about it: sales 20% lower than planned, customers paying a month later, the largest customer gone. Give the lowest cash balance in each case and the month it falls in. If the business still repays the loan in the weaker case, say so. If it does not, say what you would do, such as delaying a hire. A plan with no downside case reads as a plan nobody has tested.

4. The plan has to agree with everything else

The credit team checks the plan against your filed accounts at Companies House, your bank statements, your VAT returns and your credit file. These are the things that sink applications most often:

• the plan's starting figures do not match the last filed accounts or the latest management accounts;
• the opening cash is a round number with no bank statement behind it;
• arrears with HMRC, or a Time to Pay arrangement the plan does not mention;
• a large overdrawn director's loan account;
• accounts filed late, or County Court Judgments on the credit file.

None of these is fatal on its own if you explain it. Each one is fatal if the lender finds it first.

5. Security and guarantees

For a smaller loan the bank may ask for a personal guarantee from the directors. For a larger one it will look at what it can take as security: property, equipment, debtors. Where security is short, some lenders can use the government's Growth Guarantee Scheme, run through the British Business Bank; you apply to the lender, not to the scheme. Say in the plan what security you can offer. It saves a round of questions.

6. The people

Bank credit teams in the UK are taught a checklist called CAMPARI: character, ability, margin, purpose, amount, repayment and insurance. Character and ability come first. Who runs the business, what have they done before, and who covers what if the owner is ill? Two short paragraphs on the team, with real experience and numbers, do more than a page of mission statement.

How to test your plan before the bank sees it

1. Does the first page say the amount, the purpose and your own contribution?
2. Is there a monthly business cash flow forecast for at least the first year, with the repayments in it?
3. Does the opening cash match your latest bank statement?
4. Do the starting figures match your last filed accounts?
5. Are VAT, PAYE and corporation tax in the months they are paid?
6. Is there a downside case, with the lowest cash balance and its month?
7. Have you explained anything on your credit file or with HMRC before they ask?
8. Do the profit and loss, cash flow and balance sheet agree with each other?

If you need the plan written, see business plans.

Questions

Applying under the government scheme? See Growth Guarantee Scheme: what a lender needs. To see your company the way the lender will, there is the business loan review.