A Guide to Getting a Bank Loan to purchase a Business

Franchise Applicants generally need to apply for a business loan and therefore need to go a thorough bank loan application. Kwik Kopy Australia is an approved franchise system with the major Banks (Westpac, ANZ).

However, obtaining funds is getting harder. This article will assist you to prepare your Finance Application and maximise your chance to obtain your loan application approval.

In the present financial environment:

• Banks re-instated old quantitative and qualitative controls and are more cautious about the applicant’s ability to repay the loan and the security the applicant has on the business loan.
• Most banks who were keen to build their loan portfolios and establishing customer connections are now conservative and reluctant lenders who only loan funds when the applicant meets all the guidelines. As a result, they are making it harder to borrow funds.
• Non-bank lenders are offering lending products 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 business loan a time consuming, frustrating and, on occasions, an emotional experience.

You can avoid a lot of this heartache if – as a borrower – you understand the criteria the banks use to evaluate your loan application. There is no magic 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 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 application;
3. Servicing and repayment capacity; and
4. The availability of security

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

What is the business loan for?

Your application will not progress very far if you simply ask for some money “for working capital”, or “for expansion”. You must provide details of the purpose for the loan, with supporting documentation such as feasibility studies, projections and budgets.

Vague proposals will invariably produce an equally vague response. Banks will lend for virtually any legal, worthwhile business purpose. The bank wants to ensure the purpose of the loan will enhance the financial health of the business.

For a new business venture, the bank will need to form a judgement about the viability of the venture. This is particularly relevant for new franchise businesses and the Disclosure Document is a great aid in these circumstances.

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). If the applicant is new to the bank, records for at least the previous 12 months.

The bank will not make a loan on outdated information. An applicant who cannot produce reasonably recent figures inevitably arouses a negative response. The bank should receive realistic financial budgets/projections showing the business’ ability to generate sufficient cash surplus to cover the loan.

The loan will be used to acquire physical or financial assets which can be expected to produce income for the business. However, expect the bank to scrutinise your projections closely. 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, you must prepare your cash flow forecasts should for at least 2 years ahead.

For new ventures with no financial history, these forward projections are critical. If the projections are unbelievable or too difficult to assess, it is unlikely the bank will 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/advisor to the loan interview to explain the financial aspects of the proposal if you are not fully conversant yourself. Evidence of a good accountant or reputable advisor is involved in the planning of the business can be reassuring.

Questions and security about your loan application

Certainly, the viability of a lending proposition has nothing to do with the security that you may promise.

If the position is unsound regarding the criteria considered, then the taking of securities cannot make it sound. (Exception with short-term bridging finance where the loan is to be repaid from, say, the sale of a property). The reason is that the realisation of securities is 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 application to offset the risk in any lending transaction. 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 mortgage debentures, specific charges, life insurance, 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 is a frequent cause of friction between banks and borrowers.

There are several 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 owners of a business is that there are insufficient suitable assets in the business to secure the loan application. 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 borrowers often dispute the value of the lenders’ securities. The problem is that the bank must assume about the real value of securities months and years into the future. Some assets, such as vehicles and machinery are depreciation assets. Even “quality” securities, such as real estate and certain kinds of financial assets, are subject to fluctuations in the market. Thus, the banker no choice but to be conservative in valuing securities and they will look for a safety margin.

Working Assets

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 bank will test the value of that security.

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 are obsolete and you neglected the maintenance. They collect best debtors first 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, In franchise businesses, the franchisor will carefully deal with this mechanism alongside its interests. The Franchisor also hold certain rights over the business through the Franchise Agreement.

Business 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 assess the best structure of your business loan. Not only is there a need to look at rates and terms, but charges and initial fees can quickly make a competitive interest rate non-competitive.

Summary

It should be obvious that the banks are there to provide you with the money to buy/develop your business.

Equally, they exist to provide their own shareholders with a return on funds. You must prepare yourself, for you to obtain the best business loan structure. We found that working with a 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 a Bank already rejected your business loan, it will make it harder for the Broker to help obtain loan application approval.

If you are considering investing in a Kwik Kopy Centre, reach out to Peter Fiasco on 02 9967 5500 or by email on franchise@kwikkopy.com.au.