Cape Town - A Fin24 user has a functioning business but has an idea to diversify his business and lacks the funds to take the next step. Standard Bank said a business should get their ducks in a row before asking the bank for money.
Fin24 user Tre wrote: “We have a factory that manufactures wooden pallets. In the process we produce tonnes of waste material such as sawdust and offcuts. We would like to recycle this waste and put it back into the system, but we unfortunately don't have the funds to do so. If we could get some help we could provide more employment.”
Standard Bank said it would consider the below qualitative and quantitative factors before making a decision to assist. However, if the numbers don't stack up there would be no compelling case for the bank to lend to you.
This shows the bank how you have been conducting your business affairs, so it is important to prepare monthly books and annual financial statements. It helps them measure the financial performance of this entity seeking to borrow from the bank.
Keeping up-to-date financial records indicates that you are a responsible businessperson who regularly monitors your financial performance.
With annual financial statements, you are able to demonstrate how sustainable the business is as the historical financial performance will be there for the bank to assess.
From the annual financial statements, the bank can determine historical growth rates, margins, profitability, cash flows, liquidity and the solvency position of your company.
Cash flow generation
You need to demonstrate that you are able to translate your profitability into actual cash. Is your business printing cash or hanging by the thread? Remember that cash is what will enable you to repay the loan.
The bank will assess how much cash you generate and will examine what your cash needs are in order to maintain or grow operations. It could be cash for maintaining existing machines or to buy additional ones, because you wouldn't want to incur debt that will stifle the growth of the company.
The rest of the cash available will service the interest and capital repayments of the loan. The bank also likes to keep a buffer regarding this cash, as they would not want things to be too tight. Hence a request for a loan would be accompanied by financial covenants.
You need to demonstrate that this business will still be operational in future. What do you consider to be the economic factors that drive the market you operate in and how will those factors affect your business going forward?
The owner of the business should understand their business the best and know what affects their business, as they have the inside information.
Failure to apply one's mind when forecasting information results in the bank having to apply its own discretion, often to the detriment of the borrower.
The bank will test all the assumptions used in the forecast such as the revenue growth rate relative to overall economic growth, impact of revenue growth on costs, interest rate fluctuations and also what the impact of rapid growth will be on your balance sheet, capex and working capital.
Purpose of the borrowing
If you are borrowing to grow the business, through acquisition or new equipment that will improve the efficiency of your operations, perfect! The bank likes this kind of borrower because these activities will result in improved sales, profitability and in all likelihood increased free cash flows. So the bank's risk is reduced somewhat.
Who is the borrower?
The bank likes to know whom they are backing in any lending transaction. The key thing is management's experience in running the business and their reputation thereof. Do they have any qualifications? What other successful operations have they run before? What is their history?
What security or collateral are you providing?
Remember the bank is using someone else's money to lend to you, and they need to be assured that in the event that you default they will be able to recover the money from elsewhere. Maybe you can pledge some cash, offer a house or some other unencumbered assets.
Or maybe you have a wealthy family member willing to stand as a surety for your debt. The choice is yours, and remember, the closer the item you are providing as security is to cash the better, as the bank doesn't need to first sell the item and incur costs in the process of selling that asset before they realise any cash from the asset.
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