Applying for a bank loan can be a frustrating and mystifying experience for many business owners.
The main concern bankers have is protecting their capital, money with which their depositors have entrusted them. Their first priority is to recoup the principal of the loan, then earn a reasonable rate of interest on the loan, and finally have you prosper and open more accounts with them. Safety of principal is paramount. Bankers are not in the risk business.
Your job is to provide the banker with as many reasons to feel safe as you can. Start with a financing proposal – a statement of what you need, why you need it, when you need it, and how you plan to repay it. This should include a description of how much you need and what you’ll do with the loan, up-to-date balance sheets, cash-flow pro formas and projected income statements. All banks have forms to help you prepare these, but using your own business plan increases your credibility.
The six Cs of credit
What do bankers look for when considering a financing proposal? Here’s a start:
Personal character is important. The bank’s experience with you is critical. The judgement of the character of an individual is based on past performance. Personal and business credit histories will be reviewed.
This is figured on the amount of debt load your business can support. The debt-to-net-worth (debt/net worth) ratio is often used to justify a credit decision. A highly leveraged business with a high debt/net worth ratio is perceived as less creditworthy than a company with low leverage.
Your business plan can make a difference. Suppose it shows that the loan will increase earnings and lead to a swift reduction in the debt/net worth ratio. Your chances of a positive answer would increase. Keep in mind that a good banker is the ultimate realist. Don’t try to snow your banker with numbers.
Economic conditions have a profound effect on credit decisions. If the bank is persuaded that a depression is coming, it won’t extend credit easily.
Collateral is a secondary source of loan repayment. They want the loan repaid from operating profits and inventory so you become a bigger, better borrower and depositor. But just in case things go sour, a bit of collateral makes your banker sleep better at night.
Do you know your business? Can you be counted on to be level-headed? How credible are your plans? A business plan helps you answer the banker’s questions without hesitation, sending your credibility rating soaring.
6. Contingency plan
A contingency plan is a useful financing tool. Bankers like to see that you look ahead. A contingency plan is a short worst-case business plan that examines the options that would be open to the business and how those options would be treated. Decisions made in panic are poor decisions.
Bankers and risk
Bankers are risk-averse by training and temperament. They can’t take the kinds of risks a venture capitalist or private investor might; that isn’t their job. They tend to shun start-ups. They hate surprises. This leads to misunderstandings between business owners and bankers. Business owners, actual or prospective, have to learn that the relationship between them and their bankers should be businesslike.
Get to know your banker
Take your banker to lunch. Always be honest with him or her. It pays. Make appointments before dropping in. Bankers are businesspeople and appreciate ordinary business courtesy. Keep in mind that your relationship with your banker should be cooperative, not antagonistic, subservient, fawning, obsequious, mistrustful or fearful.
A good banker is a terrific asset, so shop around to find a banker you can work with. The role of your banker is to help you make your business successful. A good banker will sometimes do things that you don’t agree with, such as turn down a loan request or try to get you to maintain a cautious debt/net worth ratio. How do you find a good banker? Ask around.
Know the kind of credit you need
The basic rule is to fit the term of the loan to the purpose. Some loans call for term payments that include principal and interest, others for interest only with lump sum principal reductions. The package can become complex. If in doubt, ask your banker for advice: “I want to expand. Here’s the loan I think I need. What do you think?” That’s a lot better than asking for the wrong loan at the wrong time in the wrong way. Your banker wants you to succeed and knows that there’s a high correlation between asking for (and heeding) professional advice and making an SME grow profitably.
If you face a problem, let your banker know immediately. Don’t wait until it’s a Friday night “gimme a loan or I go broke“ issue. Let your banker work with you. Your banker’s job is lending money and protecting depositors’ assets. If your proposal is sound, you’ll get your loan. If it isn’t sound, you shouldn’t. And if you disagree with your banker, be prepared to back up your renewed application with facts.
Why do bankers turn down loan applications?
Except for bank credit policy reasons or banking law, applications are rejected for the following credit-related reasons:
- Too little owner’s equity
- Poor earnings record
- Questionable management
- Low-quality collateral
- Slow/past-due trade or loan payment record
- Inadequate accounting system
- Start-up or new company
- Poor moral risk
- Other (only 4% of rejections have other reasons)
Make sure you cultivate bankers for their advice and support, have more than one bank, and be prepared to ask why credit is denied before getting angry.
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.
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:
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.
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.
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.
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.
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.
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.
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.
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.
(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.
- 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.
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.
Call: 0860 040 302
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