Common Mistakes To Avoid In Your Cash Flow Loan Application

Securing funding through a cash flow loan application can be fundamental to the success of many small and medium sized businesses in the UK. This type of funding can help them to maintain operations, bridge the financial gap during slow periods, maintain relationships with suppliers and deal with unexpected expenses.

However, unlike traditional loans which usually require some form of collateral, business loans based on cash flow​ rely on the financial performance of the business. While this type of funding is flexible and ideal for a range of financial requirements, businesses often make errors in the application process that can result in rejections or unfavourable loan terms.

With this in mind, below we have outlined some of the common mistakes that businesses should avoid when applying for loans based on cash flow. This will hopefully improve approval chances and keep the business' cash flow situation viable in both the short and long term.

Inadequate Financial Information

One of the main reasons for rejection is incomplete or inaccurate financial records. As lenders are basing their decision on revenue and profit margins businesses need to ensure that any financial statements such as tax returns, bank statements or similar are relevant and consistent. Around a third of all failed applications are due to the poor quality of financial documentation.

Lack Of Focus On Credit Scores

As lenders are basing decisions on revenue rather than assets, credit scores are still a major factor. A low credit score or history of late payments can have a big impact on the chances of a successful approval. Yet more than half of all small business owners are unaware that this is the case. Checking and improving credit ratings before application gives businesses a much greater chance of success.

Requesting The Wrong Loan Amount

Asking for either too much or too little funding is another major red flag for lenders. A 2023 UK Finance report showed that 27% of SMEs that applied for loans underestimated their funding needs. It is a good idea for businesses to carry out a detailed cash flow assessment before choosing their optimal loan amount.

Waiting Until It's Too Late

A critical mistake many businesses make is waiting until they're already in a financial crisis before applying for a cash flow loan. As the saying goes, they wait until "the horse has bolted" rather than anticipating what's coming. Responsible financial management means monitoring your cash position and forecasting upcoming significant expenses such as rent, payroll, or quarterly tax payments.

Rather than waiting until you've bounced multiple payments or your suppliers are refusing service, apply sooner rather than later when you see the warning signs. It's similar to wearing a coat when the clouds are grey—it might not rain, but the forecast doesn't look promising. In business finance, it's always better to have funding available and not need it than to need it desperately and not have it.

Lenders also look more favourably upon businesses that demonstrate proactive financial planning rather than those seeking emergency rescue funding. Your application is far more likely to succeed when your business isn't already in distress.

Ignoring Debt-To-Income Ratio

Before approving an application, lenders will assess how much of a business' revenue goes towards repaying the debt. If this amount is too high it may signal a potential inability to repay the loan. Before applying for any new loans, businesses should aim to reduce existing debt, especially as a Bank of England report showed that 40% of UK SMEs already had a debt-to-income ratio exceeding 50%.

A cash flow loan can be an essential tool of modern business but businesses may need to get their house in order to stand the best chance of successful application. By taking a few simple measures, such as keeping accurate financial records, monitoring credit scores and managing existing debt in a responsible way, they can significantly improve their chances of securing the right loan, on the right terms.

Talk to our team here at Century Business Finance to find out more about cash flow based loans and the application​ process.

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