Trying to secure a loan when you’re starting out in business can be a tough ask.
Without a firm foothold on your chosen sector and some decent runs on the board, your business venture probably looks far too risky for a bank manager.
It’s a battle being waged right now by the founder of online retail store appliancesalesdirect.com.au, Jon Pysing, of South Australia.
His business has been trading for 16 months. It’s just shy of the break-even point.
Securing finance is proving a major battleground, Pysing says.
He understands his start-up is yet to find its feet, but believes he’s worthy of a loan given his long background in bricks and mortar retailing and that his online business is unlike others operating in Australia.
“We’ve created a business that removes the middle man, which means we can offer great prices. I buy and pay for all the products up front so we don’t have any loans, but the business is struggling to break even.”
Pysing is seeking funding of up to $1 million he wants to use to promote his business via a concerted marketing push.
He doesn’t believe a traditional lender will give him a loan, so he’s looking into alternative funding options including crowdfunding and financial backers.
Approaching a bank
It’s very hard for someone just starting out in business to convince the bank to give them a loan without a demonstrated track record, says independent banking expert Neil Slonim of The Bank Doctor.
To even be considered, you really need to have invested some of your own money in your business venture, Slonim says.
“Firstly, you need to have some of your own cash invested in your business venture that you’re staking on your success before a bank will even look your way.
“You also need to prove that you can repay the debt from your own cash flow so the bank feels comfortable they won’t lose money,” Slonim says.
Although, there are ways to fund your start-up in the absence of a bank loan, Slonim says.
Many starting out in business access the equity in the mortgage over their home to fund their start-up, Slonim says.
“This is one way around the issue, but this approach assumes the start-up owner has a house and that there is equity in that house, which isn’t always the case.”
Borrowing money from family and friends is another common approach, while leasing or hire/purchase agreements are also worth investigating, he says.
The other option is consider an alternative form of funding such as debtor finance. While this costs more than other forms of funding, it does mean a business can sell unpaid invoices for a cash advance of between 75% and 90% of the monies owed.
This funding alternative is increasingly common among small to medium business operators, Slonim says.
Also known as factoring, debtor finance or invoice discounting, this arrangement means that finance advances are made within 48 hours, giving a business access to quick cash. Businesses then repay the money when the outstanding invoice is finalised.
Or, the other alternative is convincing an investor to back your vision.
“The problem is that failure rates are high among start-ups. Often, this is because so many starting out in business don’t understand the role of debt and equity.”
Plan of attack
If you do plan to approach a traditional lender to fund your start-up, make sure you go in prepared.
Start by creating a professionally worded business plan that clearly defines your objectives and strategies, and be able to communicate that to the bank, Slonim says.
Start-ups should also familiarise themselves with the formal loan application process, Rob McGuinness, partner in business advisory and consultancy at Nexia Australia says.
“Start-ups should also be very specific from the outset about their reason for obtaining a loan and the amount they require. Be sure to justify these reasons and provide a clear repayment timetable as this demonstrates commitment to and understanding of the loans process,” McGuinness says.
Also, provide cash flow projections that support the repayment timetable and differentiate your business from competitors, he says.
“Consider involving an accountant to ensure the paperwork is well presented. And if possible, be prepared to offer additional security beyond what is required by the bank,” he says.
A clearly worded business plan and an ability to demonstrate the quality of your service or product and what differentiates you from the market could convince a traditional lender you’re a worthwhile risk, chartered accountant Ben Farrands says.
The executive director of BusinessNAV, which helps companies find appropriate fund sources, says an ability to demonstrate the quality of your service or product and a clear explanation of what differentiates you from the market is vital.
Also, sell the dream, Farrands says.
“Be able to illustrate you understand where your business is heading financially. This is best displayed with a cash flow and budget forecast, ensuring your assumptions for growth are realistic and detailed.”
If necessary, consider alternative funding sources in the short term, he adds.
“If you’re a new business with limited security, be prepared to consider alternative short term funding arrangements like factoring. Also consider asset-based lending structures for plant and equipment, which may assist in preserving your precious capital reserves.”
Using a broker can also help because they have access to a range of financiers, he says.
Once you’ve put your business plan together, start-ups should also look into their eligibility for grants and other related forms of financial assistance, says Rich Walker, director of Australian Accountant and Bookkeeper Strategy for small business software provider, Intuit. “In addition to government support, you may also want to consider reaching out to some of the Australian organisations that focus on assisting and funding start-ups.”
These include the Australian Association of Angel Investors, the Angel Investment Network and Business Angels, he says.
And if you get knocked back, don’t give up altogether, Slonim adds.
You could always re-approach the bank in 12 months with your business plan and account reports and show them you’ve stuck to the plan.
“There’s no harm going back with a demonstration that you’ve done what you said you would and asking the bank to reconsider your loan application,” Slonim says.