The banks are lending to small business again – at least, that’s what the ads say. So what do you need to know before applying for a loan?
Bankers tend to fall back on what the old bankers call the three Cs, character, capacity and collateral when examining a loan application.
Capacity to repay is the most critical of the three factors. The financier will want to see in writing exactly how you intend to repay the loan, whether this be via a series of repayments over a fixed term or as a total loan return after a defined and agreed period. The lender will consider the cash flow from the business and the timing of the repayment.
Collateral is any additional form of security you can provide the lender. Classically it is bricks’n’mortar – whether this is the family home or another property, the bank wants to know there is a second source of repayment. Both business and personal assets can be sources of collateral for a loan.
Character is a much-bandied-about term. You will instinctively know this to be about the quality of your past professional or business relationships (perhaps supported by references) and, more subjectively, about how much (or little) you impress your potential financier in terms of trust and honesty.
Your success in landing the loan will depend on your ability to clearly present your business need for a defined loan amount, demonstrate to the bank that you and your business can and will repay the loan, as well as earn their confidence and trust.
A more comprehensive – and indeed more likely to be successful -
approach in preparing for a loan is to build a number of documents that will present a business profile. Give them hard numbers about your company’s financial performance and give realistic projections about future performance.
Make a persuasive case of why your business needs the money and why it makes sense for the bank to lend your business money.
Ensure that his includes:
- amount and term of loan required - how much you need and how long you need it for.
- what the funding is required for - who the money will be paid to at settlement and the breakdown of plant and equipment, working capital etc.
- repayment source - where the repayments come from; this may be from revenue from the business continuing at the current rate; perhaps from increased sales due to the purchase of additional capacity in the form of equipment, or it may be from reduced costs due to improved technologies within the business by the purchase of new equipment.
- what security you are offering for the loan - the assets that are being offered to the lender as security for the loan.
What type of facilities are available?
Overdrafts are the most common. Essentially they are a credit limit on a cheque account that provides the business with short-term funds for working capital. This is considered a short-term facility as the bank can withdraw the facility by giving the business notice (generally a month).
Alternatives are commercial bills, bridging finance (typically used for new property purchase before the existing property is sold and letter of credit (short-term finance facilities for import and export).
A new entrant group are peer to peer lenders like www.directmoney.com.au that arrange loans direct form lenders to borrowers.
For longer term finding, commercial loans (generally for things like property, working capital or plant and equipment), long-term commercial bills, commercial property loans, fully drawn advances, development loans, hire purchase, leasing, debt factoring and home equity loans can be added to the mix.
Which ever way you decide to go it’s worth getting advice from someone who deals in loans and remember, an application must have these essential elements:
- Servicing ability - can I comfortably afford the principal and interest repayments on time every time?
- Security - does the lender have sufficient security to recover its debt if I can't make the repayments?
- Track record - have you been able to do what you said you could do in your dealings with banks in the past?