Financing Advice & Tips
Your ‘Risk Profile’, the ‘5 C’s’ and a process that must be understood for the best possible chance of success.
We’ve all dealt with the banks personally and likely for business as well and in many cases, the process can seem more challenging than it ought to be… so… what is it that banks really want? And how can we set ourselves up for more likely success in our dealings with banks?
To establish a person or entity’s capacity for borrowing, the banks look to give the clients a risk grade, or what we call a ‘Risk Profile’. Specifically they review what’s commonly called the ‘5 Cs’ within the industry, outlined below.
Success with the bank is not just about getting a ‘yes’ or the cheapest interest rates and costs its also about the terms of the loan agreement, as a result it is important to start with the end in mind. In other words, do the work upfront to make sure you’re more likely to succeed at the other end.
What is the party borrowing the money for? Is funds being used for an acceptable purpose? i.e To assist with growth of the business, create cash flow and wealth for the individual.
Whilst assessing your character this might sound very personal, it’s much more about what experience the proposed or current business owner sourcing the funding actually has – do they have some background that means they are more likely to succeed, or a well established track record of successful ventures. They will also review how well the person or business - generally both - have operated their accounts in the past. For example, if the accounts are reviewed and there is a lot of arrears, that can be red flag for a bank. Or, another example is that if a person has earnt a lot of money over time with say, a high salary, but has little to no savings to show for it – the banks tend to take that as a sign that the person is not good at saving and or potentially not great at paying off debt. Another test is whether that business or person is meeting their ATO commitments on time. A good repayments / savings history, proven ability to create wealth and employment history does add strength to an application for finance Whilst any negatives in these areas are not insurmountable, we need to be able to express what experience we have that makes the party a great option for this business purchase or expansion, as well as factoring in our history with our finances and our current financial position.
This is about answering capacity for borrowings. The banks will ask the question: ‘what capacity has the business got to meet the commitment of the loan
and the other personal commitments required by the business owners?’
In other words, the bank will assess the ability of the business to repay its debts and provide a reasonable lifestyle whereby the owner or owners can also pay their other known commitments with a level of comfort.
As Sir Richard Branson says, “always cover your downside” – so it’s critically important to carefully review and manage your own risk. What are the likely scenarios if everything went wrong? What impact would that have on your business and therefore your ability to repay the loan? What would
the likely consequences be for you and your related entities or even your family?
Likewise the banks are interested in managing their risk too – they will back a good business proposition but not without greatly reducing the risk to them via security. To do that, they want to know what collateral - assets or other sources of income - you have that will sit behind the loan as security. This collateral protects and supports the bank in getting their money back if anything does go wrong and they need to recover the funds loaned.
Other risks that the banks looks to have covered is in the event that you were unable to generate an income due injury, illness or death. For most
people, their ability to earn an income is their most valuable asset. Its literally worth a fortune over their working lives. And yet most people neglect to properly insure this asset against the prospect of serious injury, illness or death – the three things that could stop them earning that income.
Depending on your ‘Risk Profile’ from the first four topics discussed here, the banks may provide the loan subject to certain conditions to further mitigate their risk. For example, the bank may require the business to provide certain information throughout the loan, or reduce the loan term to get their money back sooner.
As a result, whenever you are looking at sourcing finance its also about reviewing the conditions the bank might put on them and your ability to meet those potential conditions, as well as meeting all repayments.
Unlike others, we work to establish your estimated ‘Risk Profile’ at the beginning of the finance process, from many years of experience we know that whilst nothing is guaranteed in the arena of sourcing funding, starting with your ‘Risk Profile’ we are far more likely to succeed. Each bank has a variety of standards, rules, regulations, policies that make some a better fit than others depending on your unique personal and business circumstances. Once we know your ‘Risk Profile’ it is far easier to make sure we apply to banks that are a better ‘fit’ for you and your situation.
How the lending process works for a soon to be business owner
Turning Dreams to Reality…
Most soon to be business owners start with a dream – a dream of being business owners or entrepreneurs, a dream of a new lifestyle and income levels. As part of that process, it is critical those individuals have done their homework and have a strong understanding of the business you intend to buy, the drivers of that business, the returns generally experienced in the industry, the usual working structures, cash flows, and overall operations.
From there, the key to turning that dream into a reality is answering key questions like the following:
• What capacity have you got to operate a business?
• What equity and cash have you got to put into the transaction?
• If the business type has a bank standard for lending policy
• If you go to buy a business, will the annual return be sufficient enough to meet your financial goals and commitments personally?
Once that analysis has been done, we can identify the potential businesses you have the capacity to buy. From there, you are enabled to go out and find the right
business for you and hopefully, make and get an offer accepted!
Next, once the offer has been accepted, the loan process begins with the lender of choice. From the moment the offer is accepted to when settlement occurs is an average of approximately 90 days. Legal and accounting commences with advice which confirms direction.
In the accounting sphere there are several matters to deal with for example if we are increasing borrowings for an individual or family, it is critical to secure income and higher levels of asset protection. Further it’s key to get structures set up to ensure you are minising tax commitments and the accounts set up on a strong system and make general preparations for the business to begin or take over.
MPR Finance can assist with:
• Business/Franchise Purchase
• Additional Site Expansion and Development
• Refurbish or Move the Business
• Capital Expenditure
• Additional Stock
• Working Capital
• Personal Requirements e.g. Home or Investment Loans
• Ensuring Sale and Purchase Ready.