How to secure bank financing for your business Kristof Beckers 12 January 2025

How to secure bank financing for your business

Choosing the right type and meeting key metrics

Raising bank financing is essential for many businesses, whether it’s for investing in growth, managing seasonal expenses, or smoothing cash flow. Knowing which type of financing to request—and why—can make a significant difference in your chances of approval. One critical point to remember: banks look for specific business purposes when evaluating loan applications. Applying for financing simply to cover losses or cash gaps without a clear plan isn’t likely to succeed. Below, we’ll dive into the main types of financing, how to identify the right one for your needs, and the key metrics banks will evaluate when assessing your application.

Types of bank financing: choosing the right purpose
  1. Investment loans
    An investment loan is best suited for long-term projects, such as purchasing equipment, property, or even expanding into new markets. Banks favour financing projects with a well-defined objective and a timeline for returns, so it’s essential to be clear about the purpose of the investment and its expected impact on your business. Investment loans are typically structured as term loans with monthly or quarterly repayments, which makes them ideal for projects expected to generate cash flow over time.
  2. Straight loans
    Straight loans are used for short-term financing and working capital needs and repaid or rolled-over at the end of the term. These can be useful for bridging temporary cash flow gaps or seizing time-sensitive opportunities. When requesting a straight loan, be clear on how the funds will be used and demonstrate how you plan to repay the loan. Banks will want a concrete purpose and a clear repayment source.
  3. Factoring
    Factoring can be a solution for businesses looking to improve liquidity by turning accounts receivable into immediate cash. By selling invoices at a discount, companies gain access to funds without waiting for customers to pay. Factoring is often used by businesses facing slow payment cycles from clients, and it can support both cash flow and growth by allowing you to focus on core operations without worrying about receivables. However, eligibility for factoring requires that services or products are fully delivered and accepted before invoicing. This makes factoring ideal for companies with completed services but limits eligibility for businesses like most SaaS companies that invoice customers upfront.
  4. Leasing
    Leasing enables you to use essential equipment or vehicles without making a large upfront investment. This can be useful if you need assets that may quickly depreciate or become outdated. Banks look at leasing arrangements as lower risk because they maintain ownership of the asset. Leases can be structured with flexible terms, but it’s crucial to articulate how the leased asset will contribute to business productivity and revenue generation.
  5. Short-term loans for seasonal expenses
    Many businesses face large annual expenses holiday pay, and 13th-month bonuses. These predictable, substantial cash outflows can create strain, particularly for businesses looking to maintain steady cash flow throughout the year. Short-term loans designed to cover these obligations are straightforward and typically structured as 12-month loans with monthly repayments, making them a convenient way to smooth out cash demands.
Key metrics banks consider when evaluating financing applications
  1. Adjusted equity
    Adjusted equity provides a conservative estimate of your company’s value, reflecting what might be achievable in a forced sale scenario. Banks use this measure to assess a company’s financial stability, especially in challenging situations. Adjusted equity is typically calculated by deducting uncollectible receivables and intangible assets, which are harder to liquidate, from total equity. Shareholder loans may be added to this value. Importantly, adjusted equity should be positive and ideally higher then issued capital, signalling resilience and stability, which are favourable indicators for banks during their risk assessment.
  2. Repayment capability (Cash Flow)
    Cash flow is a vital aspect that banks scrutinize closely when evaluating a loan application. Strong, steady cash flow is essential, as it indicates your ability to cover operating costs and debt repayments. Banks will look at historical cash flows and expect realistic cash flow projections to confirm your repayment capability. If cash flow is erratic, demonstrating a plan to stabilize it is crucial. Companies with regular cash flow generally present lower risk, as the bank can see a predictable income stream to service debt.
  3. Net Financial Debt (NFD) / EBITDA
    This ratio gives banks insight into how leveraged your business is relative to its operating earnings. A lower NFD/EBITDA ratio indicates that your business is less reliant on debt and better positioned to meet its obligations. In general, banks prefer a ratio between 3.0 and 3.5; anything higher may raise concerns unless your business demonstrates exceptional growth or market positioning.
  4. Debt Service Coverage Ratio (DSCR)
    DSCR, calculated as EBITDA divided by the sum of interest and principal payments, reflects your ability to cover debt obligations from earnings. A DSCR of 1.2 or higher is often expected, meaning your business generates at least 20% more cash flow than required to cover debt payments. This buffer reassures banks that your business can meet debt obligations, even if earnings fluctuate.
Building a strong bank relationship

One often-overlooked aspect of securing and maintaining financing is building a strong relationship with your bank. Start engaging with your bank early on, even before you have a financing need. Regularly inform your bank about both the successes and challenges your business faces. This open line of communication builds trust and demonstrates your commitment to transparency.

Additionally, consider taking on multiple services with the bank, such as insurance, payroll management, or treasury solutions. A broad banking relationship can enhance goodwill and position your business as a valued client, potentially giving you preferential treatment in financing and services.

Conclusion

Securing bank financing is not just about ticking boxes; it’s about presenting a well-thought-out purpose, backed by strong financial metrics and a clear repayment plan. Knowing the different types of financing available—and choosing the one that aligns with your specific needs—can make all the difference. Equally important is understanding the metrics banks focus on, such as adjusted equity, cash flow, and debt coverage ratios, and working to ensure they’re in a range that banks are comfortable with.

Beyond the numbers, building a relationship with your bank can significantly improve your chances of obtaining and maintaining financing. Keeping them informed about your business’s journey, the highs and lows, demonstrates transparency and commitment—qualities banks value highly. The stronger your relationship and the better prepared you are, the more likely it is that your bank will see you as a reliable partner and offer the financing you need to help your business thrive.Additionally, consider taking on multiple services with the bank, such as insurance, payroll management, or treasury solutions. A broad banking relationship can enhance goodwill and position your business as a valued client, potentially giving you preferential treatment in financing and services.