Article by Pat Sutton in Sundays Business Post 17 April 2014
In spite of what some commentators might lead you to believe it is our experience that banks are trying to lend where possible. It up to the applicant to present their best case scenario, answer any questions the bank may have and give them confidence that you are a good investment
As a small or start-up business you are considered by default high risk. These are some of the areas the banks look at:
A well laid out business plan is a prerequisite outlining how the trader is going to deliver success. Make sure there are no silly mistakes or unrealistic assumptions in the plan or application forms. Clearly set out what facilities you are looking for from the bank and what you are prepared to offer, if anything, as security.
Pretty much top of the list will be your perceived ability to make repayments against the amount being sought. If you can’t convince the bank in this regard it’s going to be very hard to get off first base. Banks will want to look at, what if things don’t go according to plan, what is your fallback position or do you have one?
Banks are interested in an individual’s history, background and experience. They have to believe in the person. Is the applicant capable of delivering on what they say? What are their personal circumstances? Are they heavily borrowed? Or with significant personal commitments that may put pressure on the business.
The track record of any previous business is taken into account in assessing an individual. However, just because you may not have been in business before doesn’t necessarily mean you’re not going to qualify. The quality of the applicant previous work experience is considered.
At the interview stage you need to be able to demonstrate an in-depth knowledge of your business, the sector and the market. You will be asked where you are going to fit in and why you think you will be successful. Do you have a good knowledge of your competitor’s and how they operate? How will you stand out from your competitors? Make sure to highlight existing business and customers you might already have. You should be able to comfortably discuss the financials in the plan such as pricing, profit margins, cost structure, capital asset investments, credit terms, and working capital/cash requirements.
It is normally expected that the promoter themselves will invest in the venture. Don’t expect the bank to be the only one to put up working capital. A recent case I advised on was a new Bakery, where the bank put up two thirds of the capital required and the promoter one third. It doesn’t have to be cash investments but maybe stock or capital assets investment. Facilities such as leasing and loans can be secured against assets in the business, and overdrafts can be secured by way of personal guarantees. Banks will want to see the money used in the right manner be it capital assets, stock, marketing or working capital.
You must consider that banks could be receiving requests for funding from several applicants in the same sector. They will only back those who they believe have the best chance of success, they won’t fund everyone.
Get professional help in advance of approaching the bank. This may cost you but it could be the difference between succeeding or failing with the application. If you can’t afford professional help then get family or friends to help you, don’t try to do it on your own. Go meet the bank well in advance of submitting your application and develop a good relationship with them and ask for their guidance and assistance.
There’s lots of useful information available out there but you need to do the research and get yourself up to speed. Review the Department of Jobs Enterprise and Innovation website www.djei.ie which includes lots of good information for SME’s including details on the credit guarantee scheme. Both of the pillar banks websites provide good guidance on how to apply for credit, AIB www.aib.ie and BOI www.boi.ie. For example AIB has dedicated supports especially for start-ups such as start-up networking and information events, along with practical aids like cashflow planners, business plan templates and guides to starting your own business. The Credit Review Office website www.creditreview.ie has information on why applicants fail to get approved for finance.
Make sure you have examined alternative sources of finance that are available such as Microfinance Ireland, crowed funding, and independent private financiers such as Bibby Financial. As a local trader you’ll find your options are limited in terms of state grants however there may be training grants available from Enterprise Boards, Leader or County Councils. In any event you should always assess all of your options.
Patrick Sutton, O’KellySutton Chartered Accountants and Business Advisers, Kildare, Sutton@okellysutton.ie