fbpx
Ultimate magazine theme for WordPress.

Five Steps To Making Your Business Bankable

358

In the course of advising budding entrepreneurs, one hears one recurring request:  ‘‘Help me get a loan to start my business.”

Truth be told. This request almost always falls on deaf ears. You will have great difficulty in get a taker. It is near impossible to find a bank that will advance credit to a start-up. The average banker will remind you of the high failure rate among start-ups, and rub this in with the fact that start-ups don’t have the revenue stream or assets to secure loans.

What the banker is saying in not too many words is that the start-up is not bankable; that a start-up lacks collateral, cash flow and good probability of success.

It’s hard to argue with that. Which is why typical start-ups look to other sources of finance, especially angel investors. Which is not to foreclose the chance of a start-up, or scale-up, to obtain loan finance.

For a founder seeking to overcome this seemingly insurmountable obstacle, or a Small Business Owner searching for scale, here are five ‘must do’ rules that can tilt the scales towards success in accessing a bank loan or line of credit:

  1. Prepare A Credible Business Plan. A business plan is the written document that describes the nature of the business, its sales and marketing strategy, its financial background, and its projected profit and loss statement. It is the road map that provides direction of the future of the business

A credible business plan is a prime requirement in applying for, and obtaining, a bank loan or similar kind of financing. You are sure to get a negative response if you ask a bank or experienced lender for money to fund your business, without accompanying your request with a business plan. That will convey the impression that you have not thought through your business idea or proposal and, therefore, not prepared for the challenge of succeeding at it.

As you are starting out in business, or have liitle experience in starting or running a business, it is advisable to seek the assistance of a business consultant with accounting skills to help you prepare a presentable business plan.

  1. Have A Skin In The Game. To have a skin in the game is to have incurred some risk, monetary or otherwise, by being involved in achieving the goal of the business. This requires that you show a significant personal investment in the business.

A lender or investor will want to see that you, the founder, has an invested interest in the success of the business before helping you. The reasoning here is simple: If you, the founder, is relying entirely on other people’s money and will not suffer a financial loss if the business fails, you will have nothing at risk and your commitment to its success will be questionable.

The rule of thumb is that your investment in the business should not be less than 20 percent of the loan amount you are seeking.

  1. Show Your Revenue Stream Before You Show Your Collateral. Your bank is more interested in the cash flow that will be generated by your business than the size of the collateral with which you plan to secure the loan. The bank wants your business to demonstrate an ability to repay the loan from its revenues, not the proceeds that will accrue from monetising your collateral.

Advertisement

The bank is likely to demand your equipment or property as collateral for the loan. But this is simply a back up as the bank is not interested in possessing your equipment or property. The bank prefers that your business has, or will have, a strong and consistent revenue stream that capable of repaying the loan. A conservative projection will be two years of positive cash flow.

  1. Leverage Your Personal Credentials. Don’t be deceived into thinking that your banker is only interested in your proposal. Your banker is equally interested in you, as a person and as the prime mover of the business. Your banker needs to be convinced that you have the qualification and experience to start and/or run the kind of business for which you are looking for money.

Besides being assured of your qualification and experience to deliver on your idea or proposal, your banker is also funding you, the aspiring entrepreneur or Small Business Owner. Your banker wants assurance that you are a person of character, that you can be trusted, that your word is your bond and, barring the unforeseen, you can be counted on to repay the loan as and when due.

  1. Pay Yourself Last. Popular advice in personal finance literature tells you to pay yourself first. Not so with business finance.

In business finance, your best advice is pay yourself last, if at all, especially when the money is coming from a bank loan. You will be raising a red flag if your salary features in the use of funds section of your business plan. While your bank will eagerly lend you money to buy raw materials to fulfill orders from customers or buy equipment to enable production, it will be most reluctant to give you money to pay yourself a salary.

As the founder of a start-up or a Small Business Owner planning to scale, you should count on not taking a salary for the first one or two years. This will have the doubly positive effect of strengthening your credibility with your banker and counting as part of your skin in the game.

The loan option could work for your business if you can produce a bankable proposal. It is a vital and viable alternative to searching for angel and venture capital investors because, in the long run, the cost of servicing a loan will be much cheaper than that of ceding a big share of equity and control in your business.

Click here if you have a bankable business idea or proposal and are worrying about how to finance it.

Don't miss out!
Get The Best Tips And Tools In SME Finance Every Week
Invalid email address
WP to LinkedIn Auto Publish Powered By : XYZScripts.com
%d bloggers like this: