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Bank Financing

The risk preference of most banks is such that it is difficult for them to provide capital to businesses with no operating record.

Greg Fisher

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If a bank does get involved with a start-up business, they seek enterprises that adopt a tried and tested approach to doing business, such as a franchise. Banks may however be willing to fund certain assets for a start-up business, such as plant and machinery, and they will also be willing to provide capital to a small business that wants to grow.

When developing a business plan for a bank, the three most important things to focus on are:

1. Risk mitigation.

Bankers granting a loan to any organisation want to know that they are minimising their risk. They are not looking for the hefty returns demanded by VCs, but they are looking for assurance that the loan they grant will be paid back with the requisite interest. They also seek to make loans where they will have an opportunity to recover the value of the loan with the sale of assets or surety if the company does fail.

Therefore, if you are preparing a business plan for a bank, focus first and foremost on risk mitigation. Make the venture seem as safe and solid as possible, address issues of risk and have risk mitigation strategies highlighted in the plan.

2. Cash flow.

For a loan to be repaid, a business needs to generate cash flow. Bankers will therefore pay a great deal of attention to the cash flow forecasts of a business. They will ask themselves these questions:

  1. Are the assumptions underlying this forecast reasonable?
  2. What is the probability of this forecast coming true?
  3. What is the worst-case scenario?

That’s why you need to focus on creating strong assurances around cash flow forecasts in developing a business plan for a bank.

3. Familiarity, understandability and verifiability.

To feel comfortable providing a loan to a new business, a banker has to recognise and understand the proposed operation of the new business. The more radical or disruptive your ideas, the less likely they are to look favourably on the venture. In a business plan for loan funding use recognisable examples and familiar language to explain what you are doing.

Bankers also like things that can be verified, such as reference to a commitment for a long-term customer contract – if they can see a signed copy of the contract and corroborate it with the customer, all the better for the entrepreneur seeking the capital.

Therefore, as you prepare a business plan for loan funding make sure that all the key elements of the business, described in the plan, are familiar and recognisable to a banker, help them understand the business and provide verifiable evidence for what you say wherever possible.

Greg Fisher, PhD, is an Assistant Professor in the Management & Entrepreneurship Department at the Kelley School of Business, Indiana University. He teaches courses on Strategy, Entrepreneurship, and Turnaround Management. He has a PhD in Strategy and Entrepreneurship from the Foster School of Business at the University of Washington in Seattle and an MBA from the Gordon Institute of Business Science (GIBS). He is also a visiting lecturer at GIBS.

Bank Finance

The Ups And Downs Of Borrowing From The Bank

New businesses need access to funds, and banks are usually the first place that business owners approach.

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New businesses need access to funds, and banks are usually the first place that business owners approach. 

But getting a bank loan is not that easy as very few entrepreneurs fit the strict criteria that banks set. While some banks are trying to make it easier for SMEs to get loans, it is generally a lengthy process and will test your patience as you will be required to provide a wad of information. 

Here are the pros and cons of approaching a bank for a loan:

THE UPSIDE 

1. Familiarity

Most of us have bank accounts and we are accustomed to and comfortable with our bank as our financial institution, so it is natural that we will usually think of this option first when looking for a loan.

There is some comfort to be had in knowing you will be probably be treated fairly by a big institution.

Related: Funding Solutions That Support Business Cash Flow

2. Choice

For new business owners and entrepreneurs, the banks have a variety of good loan plans to suit various SME needs. Check carefully – banks make their money from the interest charged on these loans, so make sure you know and understand the repayment terms of the loan plan you choose. 

3. No ulterior motives

A bank loan is granted purely for the interest the bank will earn from the loan. Banks will not demand part ownership, decision-making powers, or a share of your profits, leaving you in peace to run your business. 

4. Lower interest

Bank loans often have a much lower interest rate than other options like credit cards and last-resort money lenders.

5. Tax advantages

If you get a loan from a bank, your tax charges may reduce because the percentage of profit that is used to repay the loan is exempt from tax. 

cons-of-bank-finance

THE DOWNSIDE

1. It’s Complicated

The mere volume of detail that banks require to consider extending a loan is problematic for many entrepreneurs. The process can be extremely frustrating and time-consuming. Be prepared for a lot of back-and-forth before the loan is granted! 

2. Banks prefer to lend to functional businesses

Because it is easier to calculate credit history and profitability, banks give preference to businesses that are established and running. If you are trying to fund a start-up, you are not a preferred client, so be prepared for an uphill battle. 

Related: 6 Rookie Investor Mistakes You Must Avoid For Profitable Investing

3. The arduous business of qualifying

It is not always possible to live up to the standards that the banks expect in order to qualify you for a loan. Their list of conditions is long and tedious.

Make sure your financials and other relevant documents are as comprehensive as possible. 

4. Added Risk

Usually when taking out a bank loan, you need to put up some collateral – like your house! If you do this and run into trouble later, this collateral could potentially be lost. Do not fall into the trap of being so positive about your business prospects that you think this will never happen. 

5. It takes so long

The application for a bank loan tends to be a long, drawn-out affair. Banks need to verify every detail, and this can considerably delay the application process. The more information and supporting documents you have, the better, but be prepared for delays. 

6. Only a part loan may be granted

It is not uncommon for banks to grant a loan that is just a percentage of the amount requested by the business owner. This can be quite a set-back and you need to think about whether it is worth going through the application process with more than one lender to get the full amount you need.

7. Other options

There are other options out there, including innovative funding solutions. While many small business owners start off their search for funding with their bank, it may be worthwhile to do some research into whether there are easier options which are more applicable to your business, or to your stage of business development.

But be careful – make sure your repayments are sustainable as interest or repayment rates may be higher than those of the banks.

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Bank Finance

Why Banks Should Focus On Leveraging Trust To Maintain Its Space In Finance

Remaining relevant in the digitally savvy world of cutting-edge fintech solutions is an important consideration for banks. It is also one which should be prioritised, if financial institutions want to avoid losing their place in the market.

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Banks have, arguably, built a proud legacy of trust, which has long secured its place and relevance in the world.

That could change, however, particularly if banks don’t embrace the demands of digitally savvy consumers, and contend more imaginatively with the cutting-edge alternative fintech solutions that are vying for the top spot.

The legacy of trust

Banks’ roles in managing and securely storing funds for individuals and businesses was long uncontested. Admittedly, consumers’ options may have been limited, but financial institutions excelled in what they did, and built long-lasting relationships with customers. This is evident in customer loyalty statistics.

Related: Developing Partnerships With Fintech Innovators

The advent of the Internet and online banking services has shifted how people interact with their banks. As the technology becomes more user friendly and security becomes less of a barrier, more people are willing to engage with their financial institutions in this way, managing their finances remotely.

Their willingness to do so is testament to the trust their banks inspire, and the work they have done to promote new channels of communication and transacting.

This technological shift has been beneficial to banks that have embraced it. Online and mobile banking offer vastly reduced costs incurred by banks, through limiting the number of more costly in-branch transactions. The next shift is unlikely to be quite as positive, unless financial institutions look ahead and adapt.

The rise of a new generation

Although the current trend seems to be towards alternative banking solutions growing in popularity, when it comes to storing or investing large sums of money, the trust held in the more traditional financial institutions has largely endured.

This may, however, be shifting as the younger, more tech-savvy generation becomes the driving force of the economy.

Consumer scepticism of new fintech solutions will almost certainly diminish, and no longer will slow adoption of new banking and payments platforms be a challenge. The younger generation has grown up with digital technology and applies it to all aspects of daily life, without many doubts over security or privacy.

Related: South Africa Is Becoming Africa’s Fintech Hub

As this becomes the norm, the window of opportunity for banks grows smaller. Holding on to traditional banking and outdated approaches will only result in banks stagnating; giving rise to its greatest fear – becoming obsolete.

To prevent being locked out as the window closes, financial institutions must leverage the trust that is still its trump card, by providing innovative value-added services that engage older and younger generations in all sorts of new ways, daily.

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Bank Finance

(Directory) Private Sector Funding

We always have to remind ourselves that these are profit-orientated entities with a well-structured risk management model in place. Some of the offerings are more flexible than others, but keep in mind, they are also businesses.

Entrepreneur

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ABSA Absa Logo

Offering

  • Business revolving loans (loans without re-application)
  • Working capital solutions (cash flow assistance)
  • Business overdrafts (no loan applications)
  • Term loans (term loans for purchasing assets, eg. equipment)
  • Development credit fund for those without sufficient security or collateral
  • Absa Enterprise Fund (for 100% black entrepreneurs)
  • Debtor financing.

Requirements

Each offering contains very specific requirements and documents to complete. Collateral and surety are embedded requirements, but have a look at the new Development Credit Fund.

Contact

Call: 0860 040 302

www.absa.co.za

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