Understanding how business finance decisions are arrived at by general lenders will really help you in obtaining finance in the future.
This simple model is an example of the process general lenders use to asses applications for business finance. When we talk about ‘general lenders’ then we refer to banks and finance companies that are not specialised.
Specialised lenders such as bridging finance, or asset funders operate slightly different models, however comparisons can easily be drawn.
The idea of providing this model is not to benefit your business directly but to enable a better understanding of what happens when you apply for business credit. Having a better understanding of what happens will allow you to achieve better results.
The PAR Model
The idea is to understand the thought process and how the lender operates. Note that the model operates from one area to another in order, this is generally the system most lenders will use.
If you fail one section you are unlikely to move on to the next, OK?
Let’s try and go through each item in turn to clarify things;
P – Person
Seems pretty sensible. It is about how good you are, what you bring to the party, can you run your own finance, is your credit history good etc.
With small business the biggest factor in success or failure is the operator. With this in mind it is easy to understand why lenders are keen to really assess the person they are dealing with.
A – Amount
It is not about asking for more money being better or worse. It is about ensuring the amount asked for is reasonable in respect of;
- What you are doing with it. In other words £20k for a new van is too much, £5k is probably too little
- Your turnover. If you are asking for several times your annual turnover make sure your justification is strong
Within this section the lender will also look at the purpose of the loan. The two, amount and purpose, fit together well. The purpose has to be business beneficial. Borrowing to put a hot tub in the office probably won’t pass.
R – Repayment
This is about where repayment is coming from. Does the business have affordability from it’s existing profits or is it relying on something else happening.
It is this area that most start-up businesses fail on as they do not have an existing established repayment method, they all rely on business growth.
The other factor here is cash flow. Making profits is fine, but there is a difference between profit and cash. Cash will take priority here.
if you need cash flow finance also, then make sure you make this clear and ask at the same time, it shows you have thought things through.
Download the template here – Resource – PAR then use it as a guide next time you are looking to raise business finance. It is a good idea to have it with you if speaking to your accountant about your proposal. Certainly look at it before you visit your bank.
If you have any questions then please contact Lime Consultancy here. You can also add comments using the reply button above, it would be great to get your feedback.
Remember that we always give these models to you free, just because we are nice people.
By Lime Consultancy