Something borrowed
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Most hauliers need to borrow money from time to time, and securing a loan can be made easier if you understand what makes a bank manager tick.
To appreciate properly the attitude of banks towards small business lending, hauliers—especially ownerdrivers—need to understand something of the risks and costs involved. There are more than five-million self-employed people in the UK and some two-million businesses—more than 90% of all firms are very small. Financially, perhaps 75% of all small firms produce only marginal profits. If the time, expertise and effort of the owners was properly costed, most would lose money. Failure rates are very high, even in a buoyant climate: 90% fail within five years and 90% of the survivors fail within the second five years. Depressing as it may be, out of every 100 new firms, only one or two will last for 10 years or more.
So what, in order of priority, are the factors which are considered when a request for funding is received by the bank?
Management
Statistics show that the quality of management is the single most important determinant of risk when lending to any business. But the bottom line is that no matter how enticing the proposal, business lending is all about individuals. When pressed, most bank managers will concede that many lending decisions come down to a gut feeling about the would-be borrower. While a strong management team cannot outweigh the requirement to satisfy financial tests, it can sway the lender where a decision is marginal.
Track record
The ideal position is to have established your integrity and competence with the prospective lender over a considerable Period. Factors in your favour will include trouble-free operation of your bank accounts, adherence to facilities, accurate forecasting, timely provision of management accounts, early identification of future difficulties, a clear development strategy and a record of profitable operations. If your business is new, or if a new bank is to be approached, establishing your credentials is more difficult and the opening section of your business plan must be
›biased towards this objective. If you
I: d p_ have run a successful business
before, provide audited accounts,
bank statements and the like. .?•c Failing this, you must attempt to c;,. demonstrate the proven abilities
-0
z of your management team. c) 2 Capital Base tL, If your proposal makes sense a a clearing bank will normally
provide funds equal to the fixed investment in your business such as share capital, owners funds, retained profits and realisable fixed assets, such as vehicles. They may stretch the ratio to 60:40 in your favour.
You can easily quantify the capital base of your business. Depreciate fixed assets such as machinery and stocks by at least 50% off the resale value. Add the cash retained funds invested by the owners/shareholders and any retained profits as confirmed by audited accounts. If your total business borrowings, including those which already exist, exceeds this figure, look for ways to introduce new fixed capital but not borrowings. Only when these funds are secured should you present your plan.
Liquidity
Repayments must be made from cash receipts, not paper profits. A realistic cashflow forecast is essential. The lender
will not expect 100% accuracy since a good deal of "crystal ball gazing" is involved. He must, however, be entirely satisfied of your ability to manage cashflow effectively and comfortably to repay the sums borrowed from normal operating cash receipts.
Collateral
There is a commonly held misconception that the provision of solid collateral against bank loans provides the borrower with a cast-iron case. Not only is this untrue, but banks are quick to point out that they are not pawnbrokers—the business case must make sense. Collateral is normally considered only when a provisional decision to lend has been made. The failure to grasp this reality is the cause of much friction between bankers and their customers. If collateral is needed the lender will explain what is required and the reasons for the request (which will usually relate to the degree of risk involved). Bricks and mortar security remains popular with bank managers, but less so since the property slump. If you are a sole trader or partnership, you should resist using your home or other personal assets as collateral. Many advisors will suggest that director's guarantees for company borrowings and/or charges against personal assets should not be resisted because you must demonstrate commitment to your business. This is too risky. Like the prospective lender, you must assess the level of risk in your proposal. If the lender demands guarantees and charges on personal assets, perhaps in addition to a fixed and floating charge, he has assessed the risk of failure as being high. In these circumstances you should carefully consider the impact on your personal circumstances if you provide the collateral requested. The lender will not hesitate to realise these charges should your venture fail. Never expose yourself to personal ruin for the sake of business funding you will probably regret it. Instead, ask yourself honestly whether the bank's assessment of risk is correct. If you conclude that it is, scale down your funding request, come back later, cut costs to strengthen your balance sheet, but do not be a hostage to fortune in return for short-term relief from business pressures. Every successful businessman and woman "covers the downside". The banks will do the same. I Pam this lesson or regret your error at your leisure.
El by Alan Bowes