Securing an External Loan – A Practical Guide for…

Introduction:

When running an MSME, there comes a time when external financing is crucial for growth, expansion, or to maintain day-to-day operations. Whether it’s a bank loan, government scheme, or investor funding, securing an external loan can provide the capital needed to take your business to the next level. However, this process can be daunting, especially when lenders are looking for solid proof of financial health and future stability.

In this article, we’ll break down the key financial elements you need to manage, track, and present in order to increase your chances of successfully obtaining an external loan.

1. Cash Flow Projections – The Lifeblood of Loan Approval

Cash flow is the primary concern for any lender. Why? Because cash flow is what determines your ability to pay back the loan. A bank or financial institution will want to see realistic and detailed cash flow projections that demonstrate:

• How much money your business generates
• What expenses are consistently recurring
• When you expect cash to come in (receivables) and go out (payables)

Tip: Make sure your projections are aligned with real-world data. Use past financials to predict future cash inflows and outflows. If your projections show that you will consistently have enough cash to repay the loan, you’ll be in a much stronger position.

2. Receivables Management – A Key to Smooth Cash Flow

One of the first things lenders look at is your accounts receivable—the money your customers owe you. If your business has a significant number of overdue invoices, it indicates poor cash flow and the risk that future receivables may not materialize.

Lenders will want to see that you are actively managing collections, reducing the time between invoicing and payment, and maintaining healthy payment cycles.

Tip: Invest in an aging report and track how long invoices remain unpaid. The shorter the duration between invoicing and payment, the more confidence lenders will have in your ability to generate cash.

3. Debt-to-Equity Ratio – Maintaining a Balanced Financial Structure

Your debt-to-equity ratio measures the amount of debt you have relative to your equity (ownership). Lenders want to know that you haven’t over-leveraged your business. A high debt-to-equity ratio may signal that your business is too risky to lend to, while a balanced ratio shows that your business is not overly reliant on debt.

Tip: Make sure your debt-to-equity ratio is within an acceptable range (typically 1:1 or lower, depending on the industry and business size). This will give lenders confidence that your business can handle additional debt without jeopardizing financial stability.

4. Budget vs Actuals – Staying on Track

Your budget vs actuals report is an essential tool for showing how well you manage your business’s finances. Lenders will want to see that you can stick to your financial plans and avoid costly deviations. A budget variance report will show:

• How well you’re sticking to your projections
• Areas where you need to improve or adjust

Tip: If you’ve been consistently off-budget in the past, it’s important to provide an explanation and show what you’ve done to correct the course. Lenders appreciate transparency and the ability to adapt to financial challenges.

5. Forecasting – Predicting the Future

The future of your business, as predicted through financial forecasting, is something lenders take very seriously. They want to see that you’re not only thinking about the present but also planning for growth, market shifts, and unforeseen obstacles. A detailed forecast will demonstrate how you plan to manage future revenues, expenses, and profits.

Tip: A 3–5 year financial forecast that includes expected cash flow, revenue growth, and cost estimates can help lenders see your vision and the feasibility of repaying the loan.

Conclusion:

Securing an external loan requires more than just a strong pitch. It requires clear, consistent financial data that shows your ability to manage finances responsibly, repay debts, and plan for future growth. With effective cash flow management, receivables tracking, and financial forecasting, you’ll be in a better position to secure the financing you need to fuel your business’s next phase.

Is your business prepared for external financing? If you’re unsure about your cash flow, financials, or need expert guidance in preparing for funding, feel free to reach out! Leveraging outsourced bookkeeping can ensure your business is on track with accurate financial reporting and projections that will improve your chances of loan approval.