As a seasoned finance professional, I’ve experienced the highs and lows of cashflow management. Securing appropriate funding is critical for any business. Without funding, growth opportunities can’t be realised and the business comes under increasing pressure from competitors and suppliers. ABS data shows that 60% of businesses fail in the first 3 years, with inadequate cashflow being the one of the primary reasons. The ATO is the number one lender of choice for small and medium businesses in Australia. However, this places directors in a precarious legal position and puts their personal wealth at stake.
Bank funding is a more appropriate choice. What’s more the very process by which a business secures funding can benefit the business, helping them to articulate and achieve their long term goals. When applying for bank funding, set yourself up for success by putting yourself in the banker’s shoes.They will ask themselves three questions:
1. Can the business afford to repay the loan?
The cornerstone of any finance application is the story behind the paperwork. Having a clear strategy is one thing. Being able to communicate that story to the bank in a language they understand is critical. Banks love numbers. Profit and Loss, Balance Sheet and Cash Flow projections demonstrate the ability of the business to repay the loan. It’s important to document and justify any assumptions. The figures must also outline any seasonal fluctuations in operations and cash movements. A 36 month 3 way forecast will give the bank comfort that you understand your funding needs and shows you can cover the interest and repay the loan.
2. Can I trust the person in control of this business?
This question goes to the character of the individuals involved. It’s important to demonstrate downturns have been considered in the forecasting assumptions. While it’s great to have an aggressive growth target, have the assumptions been stress tested. You should be able to talk to the actions you’ll take should the business need to contract. At what point would these plans need to be enacted and what would be the financial outcomes? The owner must also demonstrate openness to advice and their capacity to implement tough changes if necessary.
3. What assets can I access to give me comfort?
The most common asset that is used to support finance applications is the equity in existing property. However, other options exist. Products such as equipment or debtor financing use the value of the equipment or the customer invoices as security for the facility. Other products fund domestic and international trading transactions by using the inventory as security.
Given the asset base will be difficult to change in the short term, building a strong relationship will ensure you get access to the products that best suit your needs. Do this by addressing the affordability and trust questions and ensure you have access to adequate funding for your business.