Bank Loan: Balance Risk with Reward

Bank Loan: Balance Risk with Reward


The Investees

Start-up 1

Pieter van der Berg,  Bloem United Motor Spares

Start-up 2

Confidence Tale, Brides with Confidence

Pieter Van Den Berg applied for a loan with a local bank to buy stock for his new business, Bloem United Motorspares but was denied due to a lack of credit history. He then approached FNB, who he had banked with for 36 years.

Pieter visited his branch and spoke to the small business development representative who informed him that he needed to submit a business plan which included a breakdown of what he needed the money for. According to Pieter he applied for a loan of R750 000, but was only given R200 000.

The bank said that its investment would grow with his business.

Confidence Tlale’s plan to start her own business by purchasing a franchise improved her chances of securing a loan from the bank. She was approved as a franchisee to buy a Scarlett Bridal and Evening Wear franchise, trading as Brides With Confidence, but while she had significant savings, it wasn’t enough.

Motivating the bank loan

In order for his business plan to be comprehensive, Pieter had to do thorough research into the amount he needed. This meant he had to find out the prices of all the stock he planned to purchase. “It’s not cheap to start a business,” he adds.

Pieter had bought the business with his own money, so the bank didn’t require a deposit for the loan. He wasn’t worried about not being able to make the monthly repayments to the bank as he knew that his business was capable of servicing the bank finance. His advice to other start-ups approaching the bank for finance is to make sure that your business is viable and able to repay the loan.

A proven concept

Confidence says she always made sure that she had a clear credit history, never missing any payments. Before she asked the bank for money she also made sure all her accounts were paid up. She believes the money she had saved was a great help in securing the loan as she didn’t have a house in her name to offer as security.

She first approached other funding institutions, but they took too long, so she approached FNB and opened a business account. She explained her business idea to the bank and learnt what was required of her to secure a loan of R300 000. Confidence paid R200 000 of her own money towards purchasing the franchise.

She had to provide a number of documents, including a marriage certificate, life cover, CV, projected figures for her business, proof of residence and a business plan. “I made sure all the information was included in my profile. I couldn’t take no for an answer and would do anything, even go to Cape Town to get one signature if necessary,” she says.

Improving your chances

To other start-ups she advises that you practice patience because if you don’t love what you do, it’s easy to give up. She also says you should make sure your documentation is correct and that you know your business well enough to answer any questions about it.

The investor


Sanjeev Orie, head of acquisitions, Business Banking at FNB, explains that the key concern for banks is risk. A bank has to uncover whether or not it is possible for the client to repay the loan.

In Pieter’s case, FNB believed he had the right skills set to make his business work. He also had some money saved and a number of properties which could be used as security. This presented a lower degree of risk for the bank. However, his financials could not be audited, so the bank wouldn’t grant the loan for the full amount he applied for.

Confidence, explains Sanjeev, was buying a franchise, which is regarded as less risky, as it presents something that can be liquidated if repayments are not honoured. A franchisee also has the support of the franchisor which prevents them from making the basic mistakes of many start-ups.

A bank will look at an entrepreneur’s personal profile as the first point of departure, checking whether or not they are paying on time. Pieter’s 36 year history with FNB made it easier for the bank to get this information and helped to convince the bank that the amount of risk was minimal. “If you do not have a financial footprint, the bank will assume the worst in terms of risk,” he adds.

Sanjeev advises that start-ups start small as there is a better chance of securing a loan between R5 000 and R10 000 than  one of R150 000. When applying for a loan from the bank he advises that you submit a well constructed business case describing the problem you have identified as well as the readily available market.

“You can’t sell if you have not researched the customers and price points. Put yourself in the shoes of someone in the branch,” he says. He also points out that you will be required to submit supporting documents to back up the information you have about your customers, the market, competitors, pricing, how much money you expect to make and the different scenarios.

First understanding, then funding

While other investors consider the return they will get when a company succeeds, Sanjeev says a bank looks at risk. He explains that FNB follows three key steps in understanding what the customer’s business is about and what the customer needs.

1. Desirability test. Does the bank  want to be associated with a particular business? It will look at the business concept and whether or not it is ethically sound.

2. Transaction approach. This involves understanding the business versus the security it requires. If the entrepreneur has a groundbreaking idea, the bank is more willing to take on the risk of providing finance with less security.

3. Risk factors. The bank will look at a number of parameters to determine the level of risk, including the business owner’s performance and the collateral that can be provided. Another important factor is the timeline for the business to become cash generative and able to service the loan.

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  • Indianist Online

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