Before you begin, remember that current lending conditions are the “new normal” – don’t wait for conditions to shift. Instead, change the way you manage and monitor your business performance, with particular emphasis on increasing cash flow to reduce your need for external finance.
Before you apply for finance
Before applying for finance, ensure that you:
• Prepare a cash flow forecast to identify:
- how much funding you need
- when you need the funding
- how the business can repay any loan required
- how long it will take to repay the loan
• Are sensible about the amount you need to borrow – make sure you can justify it
• Consider how to best meet funding requirements. Financing with a bank is not the only option; there are a number of different types of specialist financing available
• Look at ways to increase cash flow to internally finance any funding requirement, such as reducing stock holdings, collecting cash from customers earlier or extending terms with suppliers
Do your research
• When you decide to seek finance from external sources, such as a bank, do the research. Shop around to find the best form of financing that meets your needs.
• Listen to other people’s experiences with potential lenders
• Consider the benefits of either consolidating your business with one lender, or having different lenders for different financing to build your credit history and spread funding risk
• Make sure you are getting the best price on offer
• Ask potential lenders what banking services and tools they offer. These tools may be helpful to your business.
Get your timing right
Approach potential lenders well ahead of time. Show them your plans, finances and projections, explain what you are doing, and demonstrate your track record before asking for money.
Project your finance needs
Keep your expectations and projections realistic. Your business banker may not be very experienced, but he or she will know a fairy tale when they see one. Bankers also have many tools to deconstruct your application.
• Be open and up-front in your dealings with your potential lender – you never know when you might need your relationship manager in your corner
• Invite your banker to see the business and spend time discussing business plans
• If possible, get to know the regional business manager and any staff that may have input into loan decisions
Prepare your application
• Make sure the application is produced to the highest quality. The more times you have to rehash your application the less likely it is to succeed.
• Be aware of lenders’ risk appetite for particular industries
• Use accountants, brokers and mentors to assist if you feel out of your depth
• Identify which assets you wish to pledge for security. If possible, keep some assets in reserve.
• If your application fails, ask why
Prepare for the interview
• Make sure you are well prepared – the lender is banking on you as well as your business
• Present your business in the best light. This will mean you’re also presenting yourself in the best light
• Ensure your proposition is sound and your business knowledge and skills are apparent
• If it will present your business in a sound light, ask your accountant to go to the meeting with you
Understand the contract
• Understand all the terms and conditions that are included in the financing arrangements
• Make sure you have processes in place to meet terms and conditions of the loan
• Comprehend what it takes to service any new loans. Look at all the fees and compliance requirements
• If you are not sure, ask your accountant to review the contract terms and conditions and explain potential any issues these may have to the operations of your business before you sign
After you have received finance
Maintain and build relationships
• Understand the decision-making structure within your lender. Seek and develop relationships with a number of people at your lender – not just your relationship manager – including the credit manager, regional manager and front-line staff.
• Always have your numbers ready and invite your lender to your business to share your experience
Manage compliance requirements
• Implement processes to capture information and prepare reports required under your financing arrangements
• Keep financials and forecasts, particularly cash flow forecasts, up-to-date.
• Do not over-extend credit lines. There is a point where lenders will draw the line.
• Try not to default on payments. Defaults can make accessing finance difficult.
• Understand the impact on your ability to access finance or refinance when entering into any payment arrangements, particularly those with the Australian Taxation Office
Gavan Ord is CPA Australia’s policy adviser, business environment.