A report by CPA Australia

According to CPA Australia’s International CFO Survey of March 2009, 44% of chief financial officers who responded had experienced difficulty accessing finance due to tight lending conditions brought about by the Global Financial Crisis.

Of the respondents who worked for businesses headquartered in Asia, the percentage experiencing difficulty accessing finance was very high at 80%.
 
The percentage of respondents working for small business who had also experienced difficulty accessing finance was also alarmingly high at 70%.

With a large number of businesses of all sizes currently experiencing cash flow difficulty, meeting the challenge of how to approach a bank for a loan will be crucial for many businesses.
 
Banks are in the business of lending to sound and viable businesses. The objective of preparing the loan application is therefore to demonstrate to a bank that providing your business with finance is a low-risk proposition.

Before approaching a bank, you need to determine the following:

1. Why you need the finance and how long you require the finance for? 2. How much finance do you need?  Be realistic about the amount of funds you require. 3. What level of security can you offer? How will the bank value the security? 4. How will the bank assess ‘risk’ for your business?

Half of those surveyed in the CPA Australia International CFO Survey were from SMEs. Their responses reflected an increased emphasis on measures to better prepare their business for  the downturn.

These measures included stress testing their business through forecast modelling; increasing the frequency of liquidity monitoring; and closer monitoring of debtors and prospective debtors to establish their credibility.

These are all crucial  elements in presenting a bank with a compelling case for lending to your business. It is important, however, that these practices become standard practice regardless of prevailing economic conditions.

Instilling them when times are good will place a business in a much stronger position during a downturn.
 
So what will a bank look for in your loan application?  Two things — information and security. The more quality information the bank has about your business, your plans and your industry, the more likely you will be successful in your application.

The more security you have, the better your chance of getting a loan. Preliminary discussions with banks will give you an idea of the kind of security they would be looking for, and the dollar value of such a security.
 
There also exists the option of a more expensive unsecured loan for small businesses that may be willing to pay higher lending costs in exchange for not risking their personal assets.

Bankers will also be very interested in how you plan to generate cash flow. If your cash flow is poor, your business will struggle to operate efficiently and repay any loan.
 
Examples of the information you require in a loan application include:

1. Short written history of the business and the experience of the people behind the business.

2. Personal financial information of the people behind the business.

3. Historical financial information. Where a business has been in operation, the bank will want to review historical financial information — typically balance sheets, profit and loss statements and cash flow statements for the past three years. Ideally, this information should be either prepared or reviewed by accountants.
 
4. The bank will require cash flow forecasts, profit and loss forecasts and balance sheet forecasts. The forecasts should be over the term of the loan, should state any assumptions made (including any independent information to support assumptions), be written as if the loan application is successful, be realistic and based on reasonable assumptions.

5. The amount of money you wish to borrow and over what period. The amount you can afford to borrow will be determined in your planning and forecasting.

6. A detailed description of why the loan is required, which is critical in determining the type of loan you require. If the loan is to be used to purchase an asset or a contracted service, then the bank should be provided with all important information, such as an agreement or signed quote.

7. Identify the security you are prepared to offer. The value of the security should be greater than the value of the loan, and the value of that security should hold up over the term of the loan.

A business plan and impressive financials probably will not be enough to secure you a loan.  At some point in the process, you will have a face-to-face meeting with the bank to discuss the loan application.
 
What the bank will want to find out is whether or not you fully understand the implications of taking out the loan, whether you really know your business and whether you have a reasonable understanding of your financial position.

A successful loan application does not spell the end of the relationship with your bank. Banks carry out annual reviews when they have provided finance and you should be ready to provide all the information you prepared in the original application. It is also likely that you will be called in for an interview.
 
For your relationship with your bank to develop on a sound basis, you must keep the bank properly informed about your business. Any tendency to tell only the good side should be avoided. Any downward turn in events should be discussed with the bank as soon as it is known.

Again rigorous collation and analysis of key business information is vital. This will greatly increase a business’ prospects for obtaining crucial investment finance and for ongoing profitability.