Home Blog Blog Franchising Blog A Guide to Getting a Bank Loan to purchase a Business

A Guide to Getting a Bank Loan to purchase a Business

Franchise Finance Bank LoanKwik Kopy Australia is an approved franchise system with a number of the major banking Groups, however, Franchise Applicants will be expected to apply for any funding based on their own security. The banks will access each application based on its own feasibility, however, obtaining funds is getting harder.

The purpose of this article is to assist you to prepare your Finance Application so that you maximise the chance that your loan application will be approved.

In the present financial environment:

 

  • The banks have re-instated old quantitative and qualitative controls and are more cautious and concerned about the applicant’s ability to repay the loan and the security the applicant has on the loan.
  • Most banks have gone from being keen to build their loan portfolios and establishing customer connections, too conservative and reluctant lenders who only loan funds when all the guidelines are met. As a result, they are making it harder to borrow funds.
  • Non-bank lenders are offering specialised lending products geared to the specific needs of particular groups of borrowers. However, they are finding it harder to obtain funds to lend.

Most people seeking financial assistance are likely to turn to a bank first. Many would-be borrowers find applying for a bank loan a time consuming, frustrating and, on occasions, an emotional experience. A lot of this heartache can be avoided if borrowers understand the criteria used by banks to evaluate loan applications.

There is no magic, secret formula which governs the lending process. In fact, there is really no set formula at all. Rather, a bank manager or lending officer uses subjective criteria to arrive at a judgement about a lending proposal. This explains, incidentally, why there is often as much variation in the lending approach of managers in the same bank, as there is between different banks.

Most bankers agree, that certain basic criteria need to be present in assessing any business-lending proposition. These factors are:

  1. The character, business capacity and experience of the borrower;
  2. The purpose of the loan;
  3. Servicing and repayment capacity; and
  4. The availability of security

It is the total picture, which emerges after considering these criteria, that determines the outcome of a loan application.

WHAT IS THE LOAN FOR?
Your application will not progress very far if you simply ask for some money “for working capital”, or “for expansion”. The purpose for which the loan is being sought will need to be spelled out in detail, with supporting documentation such as feasibility studies, projections and budgets.

Vague proposals will invariably produce an equally vague and non-committed response. Banks will lend for virtually any legal, worthwhile business purpose. The purpose of the loan is only important in that the bank will want to satisfy itself that the purpose will enhance rather than detract from the financial health of the business. In the case of funds for a completely new business venture, the bank will need to form a judgement about the viability of the venture itself. This is particularly relevant for new franchise businesses and the Disclosure Document is a great aid in these circumstances. Kwik Kopy being an approved franchise system, has already provided the major Banks (Westpac, ANZ) with a copy of our current Disclosure Documentation.

IS IT AFFORDABLE?
The ability of the business to service and repay a loan is the crux of the lending decision. It is pointless to loan money to someone who is unlikely to be able to repay it.

With an established business, the starting point is its financial track record. The bank manager will need to see certified accounts for the previous three years (if available), and if the applicant is new to the bank, records for at least the previous 12 months. The bank will not make a loan on the basis of outdated information. An applicant who cannot (or will not) produce reasonably recent figures inevitably arouses a negative response.

The bank should be provided with realistic financial budgets or projections showing the business’ ability to generate sufficient cash surplus to cover the loan. The loan itself will be used to acquire physical or financial assets which can be expected to produce income for the business (i.e. the purpose of the loan), however, expect your projections to be closely scrutinised.

From the bank’s viewpoint, the most important forward projection is a cash flow budget. This is the key indicator of the business’ ability to repay the loan and of its overall future financial stability. Except for very short-term loans, cash flow forecasts should be prepared for at least 2 years ahead.

For new ventures with no financial history, these forward projections are absolutely critical – if the figures and the assumptions on which they are based are unbelievable or too difficult to assess, then it is unlikely the bank will be prepared to help. Many owner/managers will need to enlist the help of their accountant or financial advisor to prepare this material. It is a good idea to bring the accountant or advisor along to the loan interview to help explain the financial aspects of the proposal if you are not fully conversant yourself. Evidence that a good accountant or reputable advisor is involved in the planning and management of the business; can be reassuring in itself.

QUESTIONS OF SECURITY
Certainly, as far as the major banks are concerned – and most other banks adopt a similar attitude, the viability of a lending proposition has nothing to do with the security that may be pledged. If the position is unsound in terms of the criteria already considered, then the taking of securities cannot make it sound. (One exception to this rule is short-term bridging finance where the loan is to be repaid from, say, the sale of a property).

The reason for this attitude is that the realisation of securities is invariably time-consuming, messy and unpleasant, and often results in a loss for the lender. Bankers only rely on securities as a last resort.

However, some form of security is usually required for a business loan to offset the risk inherent in any lending transaction, with the amount and type of security taken reflecting the bank’s estimate of the level of risk.

Virtually any kind of asset can be used to secure a loan, although the bank will look closely at the value and saleability of the security. Generally, banks take securities ranging from real estate mortgages and liens through mortgage debentures, specific charges, assignment of life insurance policies, bonds, debentures, etc. These are likely to be preferred assets in a banker’s security schedule. The form and value of security will reflect the type and amount of finance sought and is always negotiable.

The taking of securities on a loan or line of credit is a frequent cause of friction between banks and borrowers. There are a number of areas in which misunderstanding tend to arise:

Personal Guarantees – the main reason lenders sometimes seek to take a charge against the personal assets of the directors or owners of a business is that there are insufficient suitable assets in the business to secure the loan. There is also the undeniable fact that a substantial financial stake in a business usually equates with a strong personal commitment to the success of that business. Bankers are wary of situations in which the directors of a capital poor, but liability rich, company have little or no personal stake in its survival.

Third Party Guarantors – the value placed on securities by lenders is sometimes disputed by borrowers. The problem is that the bank must make an assumption about the real value of securities months and years into the future. Some assets, such as vehicles and machinery are depreciation assets. For example, experience teaches that certain kind of specialised machinery may fetch little more than scrap value in a forced sale. Even “quality” securities, such as real estate and certain kinds of financial assets, are subject to fluctuations in the market. Thus, the banker has little choice but to be conservative in valuing securities and they will look for a margin of safety.

Working Assets – Borrowers are sometimes peeved that a bank may take a charge against the general assets of the business and then seek further security, perhaps in the form of a charge over personal assets of owners or directors. Again, experience has shown that the working assets of a business – plant and machinery, stock debtors, fixtures and fittings – tend to realise surprisingly little in a forced sale situation, which is the only time the value of that security is tested.

In these circumstances, book values are almost meaningless. After meeting statutory charges such as wages, long service leave and taxes, which are often unpaid when a receiver/liquidator walks in, the assets of the business are likely to realise no more than about 25 percent of balance sheet value on average; the plant and machinery is obsolete and maintenance has been neglected, the best debtors have been collected and the rest are looking for reasons not to pay, stocks have either mysteriously disappeared or are in such poor condition that they are saleable only at giveaway prices, and who wants fixtures and fittings anyway.

The main reason a bank will take charge of the working assets of a business, in the form of a registered mortgage debenture, is to allow the bank to act quickly to appoint a receiver if it feels the business is coming unstuck. By exercising this power, the bank may be able to salvage something for lenders and creditors and, in some circumstances, even revive the business for handing back to its owners.

In franchise businesses, this mechanism is carefully dealt with alongside the interests of the franchisor, who will also hold certain rights over the business through the Franchise Agreement.

 

LOAN STRUCTURES

  • Modern lending practice provides for many variations in loan structures.
  • Some of the more common facilities are;
  • Term Loan, Principal & Interest payments
  • Term Loan, Interest only
  • Floating Overdraft.
  • Fully drawn Overdraft
  • Plant & Equipment Leases/Hire Purchase.
  • Revolving Lines of Credit
  • Etc, etc.

You will most likely need to get advice from your accountant to assist in the assessment of the best structure or combination of loans to suit your purpose. Not only is there a need to look at rates and terms, but excessive charges and initial fees can quickly make a competitive interest rate non-competitive. You will need to consider the purpose of the loan and the best overall structure to ensure you select the most beneficial loan for your business.
Summary
It should be obvious that the banks are there to provide you with the money to buy or further develop your business. Equally, they exist to provide their own shareholders with a return on funds. For you to obtain the best loan structure for your business you must be prepared. We have found that working with a Finance Broker will often ensure that you obtain the best possible deal from the Bank. The Broker will also ensure that your application meets the requirements of the Bank before being submitted to them. This will speed up the approval process and improve the chances that it will be approved.
However, if you have already applied to a Bank for a loan and been rejected, it will make it harder for the Broker to get your loan approved.

If you considering investing in a Kwik Kopy Centre, don’t hesitate to contact Benoit Davi on (02) 8962 8556 or by email on franchise@kwikkopy.com.au

Leave A Comment

Your email address will not be published. Required fields are marked *