Ask Bernard (part 1)

• Bernard Tanner
• 1 December 2009
• Page 1 of 2 : single page

Photo credit: Getty Images

Q1. Why did my bank knock me back?

My business has great growth prospects, with some fantastic opportunities starting to open up. Yet I still got knocked back for a business loan. So, have the banks simply stopped lending to small businesses? What can I do to get the money I need?

A: While I know some people have been saying banks have stopped lending to small businesses, for the most part lending standards for small business have remained materially unchanged - and despite the recent ups and downs in global credit markets, there is more than enough money available to meet demand. So it's simply not true that banks have been rationing credit.

Unfortunately, that doesn't mean everyone who asks will be successful in obtaining a loan, or that every business owner can borrow as much as they'd like. But having a loan application turned down isn't a judgement about whether your business will succeed. Nor does it mean you won't get a loan next time you apply. It simply means you don't meet the bank's risk standards right now.

Be sure to discuss with your banker the reasons why your loan application has been unsuccessful so that you can be better prepared next time. You may also be able to revisit your application with greater details, sometimes within a matter of days, which may well satisfy the bank's risk standards.

Remember, your banker has a responsibility to keep depositors' money safe. They also have a responsibility to make sure you don't take on more debt than you can handle. That means they have to look at your business a little differently to the way you do, or the way a potential investor would.

Certainly it's important to have a well-run business with good prospects, and it sounds like you definitely measure up on that score. But your banker also needs to see two more things:

• First, they need to know you have enough cash flow to keep up with loan repayments after covering your other costs. This is one area where some businesses could have been having difficulties lately, with tougher trading conditions putting cash flow under pressure.
• Second, they want to see that you can offer enough security to cover your debt if you get into problems. It's all about reducing risk - the risk to our depositors' money, and the risk to you if things go pear shaped. Generally, physical security is preferred, but is not an absolute requirement in every circumstance, particularly if your business has sufficiently strong cash flow.  

• Be prepared. When you're putting your loan application together, it makes a big difference if you can demonstrate that your business has, or will have, strong cash flow. That means putting together detailed projections showing how the extra investment is going to boost your revenue.
• Show your true profitability. It's worth casting a critical eye over your accounts and stripping out any optional extras (business owners' cars are a common example), letting your true profitability shine through.
• Be realistic. At the same time, you need to be realistic - in the amount you want to borrow, the assumptions you use for your projections, and your growth expectations. Sometimes it's better to take things step by step rather than trying to do too much, too soon.
• Consider all the options. Is a traditional business loan your only option? What about asset finance, where the asset you're buying secures your borrowings? Or a personally guaranteed loan? Your business banker can help you explore the options.
• Talk to your business banker. Try involving your banker in the process as early as possible. Tell them about your situation and your aspirations. They spend every day working with businesses just like yours, so the likelihood is that they'll have plenty of ideas to help you make the most of your resources.
  

Above all, don't be discouraged. Many business owners find that when they return to the bank after a year or two they have no trouble getting the money they want. Often it's just a matter of timing.

Q2. Is this the right time to launch a business?

I've got a great idea for a new online business, but I need to put in some serious cash to get it up and running. Now I'm concerned that things are still slow out there. Is this a bad time to launch a new business?

A: Here are just some of the reasons we have to be reasonably optimistic about 2010:

• In early October, the Reserve Bank dramatically upgraded its outlook for 2010, forecasting growth of 3.25%, rather than the 2.25% it had previously expected.
• Employment rose by 40,600 in September, the biggest one month increase in nearly two years.
• House prices soared to record highs in August, as measured by the RP Data-Rismark Hedonic Australian Home Value Index. Meanwhile, construction loans climbed to seven-year highs.
• Retail sales rose by 0.9% in August to a level 5.8% higher than a year earlier.
  

The outlook is brighter than it's been for some time. By setting up your business now, you could be just in time to take advantage of the improved economic conditions. But that doesn't mean it's going to be easy.

Plenty of fantastic ideas never translate into successful businesses. That's why the preparation you do now, before you launch, is absolutely crucial.

Here are some of the things you need to think about doing:

• Thoroughly research your target market and your competitors. How large is the market, both in terms of the number of customers and in dollar terms? How much of that market do you need to capture to be financially viable?
• Develop and test your unique value proposition. What will set you apart from your competitors? Why would customers buy from you?
• Create a detailed business plan, describing the market, your products, your marketing plan, your business goals, your structure - everything about your business, in fact. 
• Include a detailed financial plan, with a cash flow forecast and a profit and loss forecast, as well as an analysis of your start up costs. (If you need a helping hand, you can find a business plan toolkit and financial plan template here.)
  

At every point, be prepared to redesign your initial concept to make it work. The effort you spend getting your business model right in the beginning will be repaid many times over once you're up and running.