Credit is the basic stock-in-trade of bankers. If bankers don’t lend then they don’t make any money themselves. So, despite what your experience may be, banks need to lend money to you! The Irish banks currently have money to lend but they say that they are not getting enough ‘bankable’ proposals to take up the credit that is available and that many facilities recently approved are not being drawn down.
So how can you access that available credit for your business?
To do that successfully you have to get into the mind of the lending banker and understand what drives the decision making process that leads to a positive or negative response to your request.
Bankers’ Requirements
To approve lending to a business the banker needs to be satisfied that:
- The business has the ability to service and repay the debt
- The level of risk to that service and repayment capability is at an ‘acceptable’ level
Your proposal to the bank should clearly demonstrate that the business has the ability to service the debt and that there is an acceptable level of risk in the proposition.
To do this you need to present a credible Business Plan. Below please find a list of suggested areas to cover in your business plan.
- Business Details
Short history of the business
Main business activities
- Vision>Mission>Values>Goals>Strategies
Where the business sees itself going
How is it going to achieve its vision
Mission statement
What values it applies in carrying on its business
What are the specific goals of the business and the strategies adopted to achieve them
The main risks affecting your business and how you plan to mitigate them
- Executive Summary
One page highlighting all the key points of the Business Plan
Best written when all the rest of the Plan is complete
- Business Profile Description
Management team
Experience
Achievements
List the main products or services of the business
What are the unique selling points (USPs) of the products or services
What, if any, are the plans for product/service development
- Consumer and Market Analysis
Size of the overall market and the segment of it that you are targeting
What market share are you aiming for
Profile of customer segments and your main customers within them
Main competitors
- Sales and Marketing Strategies
Your selected route to market
Sales and marketing strategies to achieve your target market share
Branding
Pricing policy
Distribution and delivery plans
- Product Technology and Development
Number of employees and their roles
Full time/Part time
Manufacturing processes
In house/Outsourced
Suitability of plant and machinery
- Financial Information
Audited accounts for the past 2/3 years
Up to date management accounts for the current year
P & L, Balance Sheet and Cash Flow projections for the next three years
- Detailed for the first year/Summary for years 2 and 3
- Main assumptions underlying the projections
Aged list of debtors/creditors
Confirmation that tax affairs are up to date
The objective in the first seven sections is to give the banker a good understanding of all aspects of the business and to demonstrate that the business has good products and markets and that management has the experience and skills to deliver on the objectives of the business.
The banker’s decision will be based on assessment of these factors and will be founded on trust and belief in the honesty, integrity and capability of management. That is why it is so important that you have good and effective lines of communications with your banker. Bankers do not like surprises. So it is essential to keep the banker up to date with everything that is happening in your business whether it’s good or bad. Regular updates supported by quality management information will help build up this trust and, as in all situations, you will be judged more on what you do than what you say. Ideally you should give quarterly management accounts to the Bank. Fulfilling previous promises made to the bank is the best way of ensuring a positive hearing for your next proposal.
The objective in Section 8 is to demonstrate that you have converted all the plans into financial numbers that are achievable and that they demonstrate ability to service and repay the proposed borrowings.
Security
The banker’s decision will (or should) be based on assessment of the Business Plan but all bankers need a ‘fallback’ position in the event that the plan fails to deliver. You will have to provide security which will ideally be land and buildings. If you don’t own your buildings but have a good customer base Debtors can be an acceptable source of security to the bank through invoice discounting or factoring arrangements. With invoice discounting you assign your debtors to the Bank and they will advance you up to 80% of the value which you then repay when you collect from your debtors. Factoring works in the same way except that the Bank collects directly from your debtors. Even with this most
bankers will also look for Personal Guarantees. The banker sees the personal guarantee as tangible evidence of the owner/manager’s commitment to and belief in the business.
If you would like more advice from a financial consultant on marketing finance issues facing your company please contact Linda Cullen at linda.cullen@bordbia.ie and we will arrange a one-on-one mentoring session for you.