Are you in need of a business loan but are struggling to secure it? Do you battle to understand what banks want from your business? You are not alone!
Once upon a time obtaining a business loan was relatively easy, but thanks to the world credit crisis these times are long gone. Over the past 10 years, bank credit was easily gained with many businesses securing loans with inadequate security for high risk ventures. Now that the banking reigns have tightened, businesses have forgotten the art and science of dealing with banks.
There are several things to understand about the current difficult banking situation. Banks are experiencing a shortage of funding and at a high cost especially for term debt, so some are not even looking to grow. Banks are more concerned with shoring up their balance sheets and are giving top priority to their existing customers and are slow to reduce interest rates on loans.
Businesses need to recognise that they are in competition with others for scarce funds and need to present an exceptional case to achieve any bank funding, especially on favorable terms.
Remember to always keep banks informed about good or bad progress. It is your responsibility to do so, especially if existing loans are in danger of no longer complying with bank covenants and guidelines. It is never a good idea to surprise your bank, but don’t be afraid to ask them for a lower interest rate! When approaching a bank, always take a business plan to back up your request.
During these times it is particularly important to be ahead of the bank. Negotiate from a position of strength with an up to date, concise and compelling business plan – complied with help from a chartered accountant.
So what are the banks looking for? Good management and governance, with evidence of regular directors meetings with independent input. They will be impressed by controlled growth, conservative budgets which are achieved, well documented sales projections, healthy margins, controlled and predictable expenses and most of all, positive cash flow.
They will demand security over any loan. Banks can be flexible, but generally they will only consider lending against 50 per cent of debtors or stock, and 55 per cent to 65 per cent against buildings. They are reluctant to accept fixtures and fittings as security and will look for equity to debt ratio of not more than 40 per cent. Banks will seek personal guarantees. You would be wise to consider external hire purchase agreements if you want to borrow against plant.
Learn how to befriend your bank at an Enterprise North Shore ‘Sweet talk your bank’ workshop, held in association with RSM Prince Chartered Accountants. For more information and to register for a workshop see www.ens.org.nz/loan. If you have more immediate banking concerns, we recommend that you talk to a chartered accountant.
