How to make the most of your loan application - an accountant's tips

Auto-approval can cover stocking loans, overdrafts, and hire purchase facilities. The advantages of being auto-approved are that the loan application doesn’t require scrutiny and very little financial assessment is undertaken, if any.

Where a loan, overdraft or hire purchase agreement is of a more significant nature or where the application is made to a lender that you don’t have a track record or bank account with, the types of information that may be required are:

• Three years' trading accounts;
• Three years' income tax returns;
• Three years' notices of assessment;
• Tax clearance certificate.

For larger facilities, the lender is looking for a track record and trend in profitability, a handle on existing debt and repayment commitments, and personal living costs. It can be really helpful to provide some background information for these larger types of facilities.

Where profitability has increased and is, in your expectation, likely to continue at a stepped-up level as a result of past investment or expansion, it is beneficial to explain that in a cover letter.

From a farming perspective, this can include explaining in tangible terms how your business has increased, such as extra lands farmed, increase in herd size or increase in output per animal.

Identifying expenditure on assets out of cashflow and making this known to your prospective lender can also be a useful exercise in that it demonstrates to a lender that the business was able to generate excess profits, which were applied towards expanding and improving the business.

Similarly, it can be beneficial to mine down through the ‘drawings’ figure in the accounts. Drawings is the accounting term used for personal expenditures, which can include expenditures on food, holidays, personal cash withdrawals, income tax payments, pension payments, health insurance, and medical expenses. 

Where one-off significant expenditures have been included in drawings, for example, college fees or an extension or renovation to your personal home, highlighting this to your prospective lender can also be helpful in demonstrating that business profits in the future available to meet repayments will be higher than has been the case in recent years.

Where significant borrowings are required such as a land loan or large capital investments or where the proposed investment is outside of the normal business carried on or is a new business, it may be beneficial to include a business plan with the application.

A business plan should contain information such as what the borrowed funds are to be used for, any investment from personal funds by the business owner, the term over which the loan is required, the expected interest rates. 

Financial information on the likely income stream from the project and any associated costs can be collated to create what is termed a ‘cashflow projection’. 

A detailed cashflow projection will also incorporate details of the loan repayments and taxation applicable to the business and will demonstrate the amount of profits left over on a monthly or yearly basis to meet repayments. Supplementary information can also be helpful, including whether required planning permission or other legal permits have been obtained.

A business plan can be layered up with market research, reference to other similar scale projects successfully rolled out else where and ideally backed up by letters of comfort from those business owners covering costings and income. 

Non-financial information, such as details of past experience and qualifications, can be as important as financial information in giving a lender confidence.

When looking to borrow funds understanding the process and in particular understanding how long it takes for the lender to process and application can help manage expectations and prevent frustration.

For straightforward hire purchase agreements with an existing lender, turnaround times can typically take up to a week for approval and a further week or two to actually draw down, depending on how quickly information is provided by the prospective borrower to the lender.

For more significant loans such as land loans the turnaround time for assessing an application can take more than a month, and assuming approval is forthcoming the actual drawdown of funds can take an even longer period of time.

Persons should obtain professional advice relevant to their own circumstances.

• Kieran Coughlan is an independent rural accountant and tax advisor.