As a home or small business owner, there will come a time when finance, and the need to raise it, will become your top priority.
This may happen at start-up or when the need to expand and grow the company has arrived.
Raising finance is no easy task and when doing so detailed research as to what options exist is an absolute must.
My advice to home and small business entrepreneurs is that if you are looking to raise additional cash for the business, the bank should be the last port of call. There are two reasons why I say this:
Firstly, banks will require collateral for any loan and it is not advisable to be putting up your personal assets, such as your house, vehicles, insurances, etc. to secure the loan. For some, it may turn out to be the right decision but in many cases, it can have devastating consequences if the business flounders.
Secondly, statistics show that probably only around 20% of all applications are approved and one of the reasons is that small businesses tend to be looking to loan relatively small amounts which are usually not in the bank’s financial interests to grant.
As a start-up, there are other alternatives such as family and friends, small business support institutions, credit cards and the one I prefer – stay in your job and save up until you have sufficient funds to launch the business and cover the home commitments.
If an expansion of the existing business is on the cards then this is the time that all that effort expended in drafting a detailed Business Plan and particularly the section called “Growth Plans and how to finance them”, pays off. Medium and long-term financial planning in order to accommodate the future growth of your company is a “must do”. The better your planning the less likely you will need to approach a bank or any other lending option.
But let’s assume you have no other option but to approach a bank.
What do banks generally look for from the applicant?
- A clear and concise presentation as to what you intend to use the money for and what benefits the company will accrue in the short to medium term;
- The company Business Plan
- A good credit score or rating for both the company and the owners
- A good track record of a positive cash flow in the company
- Collateral that will be acceptable to the bank
Here are several ideas on how to make sure you are as prepared as possible when it comes time to present your request.
Know what it is you want
Your first step is to clearly define, for your own benefit, what you need the loan for, how you would make use of it and what your projected return on the investment will be for your company.
Later in this article, I talk about getting external help from professionals to prepare your application, but at this early stage, it is worth knowing what it is you can offer to the bank in support of your loan application.
- What is your personal and the company Credit Rating or score?
- What state is your cash flow in?
- What does your debtor scorecard look like?
- Are you involved in any legal issues that would encourage others to view your company in a bad light?
- Are you still in line with your Growth projections as detailed in your Business Plan, which of course you have been regularly updating?
- If required, do you have collateral?
Establish exactly what the bank will require in the presentation
In many countries, including my own, Governments have placed substantial emphasis on the need to grow the small and medium business sectors and in an effort to support these initiatives, the major banks have created specific departments to assist small and medium business entrepreneurs.
Their services offered usually include
Start-up support and mentoring
Financial support in the form of small loans, more suitable to the sector, and with less onerous qualification criteria.
Ongoing management support, advice and mentoring
Check to see if any of the banks in your country offer this form of service.
In any event, you will need to arrange to meet with the relevant loan department official at your preferred bank; making sure you pinhole the correct person.
Just an observation here, I am aware of a small business who applied for a loan at their bank and during the opening segment of his presentation, the owner mentioned that he intended to approach several banks with the same application simultaneously.
His bank turned down his application purely based on loyalty. They felt that he was being too mercenary and should remain loyal to the bank that had supported his company for many years and even suggested he find another bank.
I have no idea whether this is a common occurrence in the banking fraternity but it may be prudent to try and covertly find out how your bank would react in this situation, especially if you have had a long-term relationship with them.
Remember that if you are able to obtain a loan from a bank other than the one you currently use, it will probably be a requirement that you move your company account to the new bank. Be sure that is acceptable to you for the medium to long term.
No loan is free. The costs are in your loan somewhere, maybe rolled into the amount to be refinanced or even coming at a higher interest rate.
Ascertain EXACTLY what the bank requires
The format for the presentation, namely,
Short presentation supported by a written proposal;
Detailed presentation supported by a written proposal;
Are forms of media acceptable, for example, PowerPoint presentations, images and maybe even video? If you intend to upgrade your production with a new machine, a professional video of the equipment in operation can be extremely informative to the technical novice.
This would, by example, state the minimum amount of time the business must have been in operation in order to qualify to make application for a loan.
Can you bring other folks to the meeting?
You may need the technical expertise of your production manager or your money wizard in the form of your financial director.
What does the bank really want to see?
What documentation is required and is there any pecking order in the requirement, for example, they may want to explore the financial and growth aspects of your business in detail and only peruse other sections of your Business Plan. Knowing this allows you to put greater emphasis on the information that is most important and relevant to the bank.
Loan amount cut off
If at all possible, try and establish what loan amount would attract their attention. If they have a policy or even a reputation for only funding loans in excess of one million and you need two hundred thousand, pursuing the exercise with this bank would be futile.
In the old days, when you took out a mortgage, it was probably through a local bank or a credit union, and whoever gave you your loan held on to it for life. If you lost your job or got too sick to work and suddenly had trouble making your payments, you could call a human being and work things out.
Get external help
With something as important as this, get external help.
There are professionals and companies out there that offer full support with bank loan applications. Use them.
Scout around and talk to other small business owners who you know that have used this form of resource and get recommendations.
It is definitely worth the associated cost.
Their services often include an evaluation of and advice on; your credit score, the debtor’s scorecard, and your cash flow situation, all with respect to what the bank would find acceptable or not.
They will help you compile a professional presentation that will focus on the primary selling points of your application, in other words, you will be highlighting the issues that are most important to the bank, in a concise and logical format.
I have even had someone give me a reasonable projection as to whether my application would be worth the effort or not.
Once your presentation is ready, rehearse, rehearse and do it again.
All that is left to do is to try and sell your idea to the bank and the best of luck with that.