How do you make your business simply irresistible to a bank manager?
Edward Lakman is one of the lucky ones. This year he applied for a business loan for his new designer eyewear website, iFrames.com.au, and he got it.
But getting a bank loan wasn’t all smooth sailing, despite Lakman having a background in digital business and two previous successful business ventures. He talked to a couple of banks before he got the nod from ANZ.
‘We had a business plan and the business was trading, but I guess being a start-up and an online-only player they didn’t seem overly interested,” he says.
‘We also wanted a bank that would provide us with our merchant services for our credit card payments, and some of the banks made it really, really difficult for that in particular.’
Three-quarters of Australian entrepreneurs see difficulty accessing credit as the biggest deterrent to setting up a business, according to flexible workplace provider Regus.
So how do you make your business simply irresistible to the banks? Be prepared
Having a brilliant business idea is not enough; you have to prove it.
‘A lot of people don’t realise how much research they have to do to do a business plan,’ says John Kirk, small business mentor at Clearly Business.
What is the market for your product or service? How are you going to sell to that market? Why will people buy it? Who is the competition and could new entrants come into the market?
The business plan needs to detail your experience in the industry. Can BAS statements and tax returns provide formal proof of business skills?
Someone leaving the corporate world and starting their dream business in a different field is not necessarily a ‘knock-out’, says Nick Reade, general manager, small business banking, ANZ. ‘We would hone in on the numbers to make sure that if you’re lacking experience the financials offset it to some degree.’
Character is important too, says Cindy Batchelor, state general manager, NAB Business Victoria. ‘Do they have the motivation to carry the business forward; do they have the integrity to repay the loan?’
Still floundering? Bank websites and business.gov.au have business plan templates, says Kirk. Keep it real
When it comes to cash-flow forecasts, think conservatively. If your projections are based on expenses that are one-third lower than the industry average or income that is one-third higher, you’ll need to be able to explain why, says Reade. Back yourself
Banks don’t want to be the only ones taking a risk. It’s a sign of your commitment if you have some ‘skin in the game’, says Reade. A bank is more likely to be receptive to the business owner who needs $200,000 and puts in $50,000 of their own money than those who expect the bank to fund their entire requirements.
Lakman needed about $500,000 to give his business lift-off and less than $100,000 came from bank finance. The rest came from the sale of his previous businesses. Confess all
To tell or not to tell – that is the question for business owners who have credit defaults or even bankruptcies lurking in their history. Here banks say honesty is the best policy. A missed telephone bill seven years ago will be much less of an issue than a history of defaulting on other consumer or business finance debts, says Reade.
If there’s a reasonable explanation for previous trouble, share it. ‘If they have learnt from that and they are going about this in a different way, we would take that into consideration,’ says Batchelor. Time it right
Sometimes a bank’s answer on finance isn’t “no”, it’s “not yet”, says Batchelor.
She points to a butcher moving from being an employee to running his own business. ‘He didn’t have a business plan. He didn’t really look at what the cash-flow forecast would be.’
He was told to come back in six months and he used that time to develop a robust business plan with the help of a Business Enterprise Centre. Think smaller
‘We might start small with a working capital account of $20,000 or $50,000. Then as the business grows, we grow with them and the facility starts to grow,’ says Reade.
Lakman is in the terrific position of the business growing much faster than anticipated. ‘So we are currently working out what sort of additional funding we’ll need.’ Consider other options
NAB’s microenterprise scheme makes loans of $500 to $20,000 at a fixed rate of 5.99 per cent to people who can’t get mainstream bank finance. Loan recipients also get 12 months of business mentoring from the scheme’s partners, such as Business Enterprise Centres, Indigenous Business Australia or the NEIS Association.
About a quarter of the microenterprise loan recipients had applied for a traditional business loan and been unsuccessful.