As a new business owner, one of the first things you may need to help you get started is finance.
As a new business owner, one of the first things you may need to help you get started is finance. Borrowing money can often be a daunting prospect and a tricky process if you have no existing credit history, or if you are under prepared. Here we address a few tips that can assist you in preparing and presenting your case to a bank, and hopefully assist you in getting your loan over the line.
When you apply for a loan your bank will typically review what is commonly referred to as the 3 C’s: your Character, your Capacity to repay the loan and the Collateral (security) that you will provide to support the loan.
Your bank will also want to chat to you about the risks you and your business face and what plans you have in place to address these if they arise. This is something your accountant can assist you in working out.
When assessing your character a bank will focus on your:
- track record;
- experience in your industry or trade;
- credit/payment history;
- ability to provide timely and relevant information; and
- ability to do what you say you are going to do.
A business or strategic plan (mentioned in the “Accounting Tips for New Business Owners” article) is a very useful document to prepare and give to the bank to show them what you have done and what you plan to do.
When assessing your capacity to repay the loan, the bank will want to review the historical and forecast income and expenditure of your business. They do this because they want to make sure the business can generate enough income to pay the interest and ultimately repay the loan.
During this process your bank will rely a lot on the information that you provide to them, so it is important you gather the right information and present it clearly. There are a number of ways the bank will do this including:
- interviewing you and asking you questions about you and your business. It is important to be open and honest with your responses;
- independently checking the information and, in some cases, use the banks internal modelling systems;
- speaking to suitably qualified people such as your advisers, industry specialists; and/or
- undertaking scenario testing of the data that has been provided.
As you can see, the role of your accountant/advisor is an important part of your loan application process.
The Collateral is the property or assets that you give to the bank to secure your loan. In most instances this is the family home, however banks will also look at the strength of the balance sheet that supports your business. When assessing the collateral that you are looking to provide to the bank they will look at:
- the current market value of the assets;
- the liquidity of the assets (i.e. how easy it is it to sell the assets); and
- the quality/condition/age of the assets.
The bank is likely to engage valuers to confirm the value of any property that is being provided as security.
Applying for a loan can be viewed as a daunting task, however, if you are well prepared and informed and have an advisor that understands how banks operate and what they want to see, the process will be far easier for both you and the bank.