24 Nov 5 Top Tips to Improve Your Chance Of Loan Application Success
Although for most consumers the “credit crunch” is a distant memory, there is no doubt that it has left its mark on financial institutions and the way they lend money. With tighter regulation, banks have increased their focus on the sanctioning processes, meaning it is harder for the “man on the street” to tick those all important boxes essential to gaining a positive response to a loan request. As with all change, the trick is to embrace the new order and ensure the strongest of applications is submitted at the outset. This increases the chances for you to raise the necessary finance.
Here are 5 “insider” tips to improve your chances of success:
(1) Keep your existing finances in order
One of the key indicators to banks on how you will conduct your business with them, is the management of your existing finances, both personal and business.
It may appear insignificant to have an unpaid item or referral charge on a personal bank statement. However, a banker will see this a sign of financial mismanagement that will continue into your business dealings.
Bank accounts and general finances should ideally be kept in order for a period of at least 6 months, prior to an application for finance.
One option is to request an increase of your personal overdraft facility, to prevent unpaid items and referral charges. Or consider moving some of your deposits into your current account, as penalty charges far outweigh modest credit interest.
(2) Assess the profitability of the practice
It sounds obvious, as this is step one for most banks but purchasers often concentrate on the level of fee income / NHS contract, without assessing the level of profit available to service a loan.
In the current market, practices often sell for a huge premium, so loan servicing costs can eat a huge chunk out of the profit. Banks will assess a loan request based not only on current repayment levels, but also using a higher interest rate, to test the business’ ability to service the facility should there be rises to the Base Rate.
There are numerous other factors to consider, such as the Vendor staying on as an associate and the associated expense in paying him for his work.
As ever, it is important to engage specialists that can review the actual profit you are likely to receive and guide you to make a commercial decision.
(3) Carefully consider the purchase of any Freehold
It is a popular misconception that a bank will view a practice purchase finance request more favourably if the freehold is also being purchased.
While tangible security is always attractive to lenders, the additional finance requirement often tips the scales to a position where financiers are uncomfortable with the amount of debt being afforded to an individual.
In addition, careful analysis should be undertaken in order to take an informed decision on whether it is preferable to invest in the practice freehold or use practice profits to purchase residential investment properties.
If obtaining the practice freehold is desirable, an agreement can be struck up with the vendor to purchase it several years after buying the practice goodwill. This way steady performance under the new ownership can be demonstrated to a lender, by way of the practice financial accounts.
(4) Gain management experience before applying
Managing a practice is not the same as being clinically excellent.
One of the top reasons cited by banks for the failure of a practitioner’s first practice is the new owner’s lack of management experience.
Making the transition from Associate to Principal can make for a rocky first couple of years. It can be a case of sink or swim, so also importantly, set the precedent for how you will manage the practice in future.
While it may seem impossible to gain management experience before the event, Associates can take a hand in managing the practices they currently work in, increasing their knowledge levels.
In addition, there are courses available on managing practices. Both of these activities will read well on a C.V. presented to a financier.
(5) Build a team of experts to help you
A common mistake is to believe that you can make a better job of it and save money by not engaging advisors.
This is a false economy as all of the above mentioned pitfalls can be avoided by seeking the advice of those who have “been there, seen it, done it.”
Seek professional advice for all of your business transactions. Banks will be comforted that you are surrounded by advisors, leaving your time free to concentrate on what you do best, treat your patients.
Assisting with the set up, purchase and expansion of healthcare businesses is what we do.
Contact Kevin, for an initial conversation to explore your options.