If you’ve ever dealt with the banks before, chances are you found the process somewhat challenging. But it really needn’t be. Let’s look at arming you with a bit of ‘insider’ knowledge so you enjoy a better, more productive experience…
It’s important to understand the concept of risk profiles when applying to the banks for funding for your business, or a business purchase. A risk profile is a grade banks assign to you when establishing your capacity for borrowing. As part their risk profile analysis, the banks look specifically at what’s commonly referred to within the industry as the 5 C’s.
Address the 5 C’s upfront to increase your chances of a successful outcome.
1) Character. While assessing your character may sound very personal, this is much more about what experience you have – do you have some background that means you are more likely to succeed, or a well-established track record of successful ventures? The bank will also review how well you/your business have operated your accounts in the past.
2) Capacity. This is where the banks look at the ability of the business to repay its debts, and whether it will enable you – the owner – to pay your other commitments with a level of comfort. As part of this, the bank will also assess how the business and your co-owners (if there are any) could continue to meet financial commitments in the event injury, illness or death.
3) Capital Few business owners fully understand the need to manage a balance sheet to minimise its capital requirement. The debt to equity ratio of a business is absolutely critical for banks. Having an inflated balance sheet, where the difference between debt and credit is used to fund your business, is a major flag to bankers. Bankers understand their exposure to you is immaterial to their balance sheet but material to yours. Your commitment to your wealth is their security and tight management of your balance sheet demonstrates just that.
4) Collateral. Banks need to manage their risk – 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.
5) Conditions. Depending on how your risk profile is looking, the banks may provide the loan but impose certain conditions to further mitigate their risk. Common conditions include:
- Property and business valuations.
- Copy of lease and franchise agreements to confirm terms.
- Confirmation of insurance policies held for business, property and key person insurance.
- Benchmark reports confirming business performance.
So, whenever you are looking at sourcing finance, you should think about the conditions the bank might put on the business, and your ability to meet those potential conditions, as well meeting all repayments.
Negatives in the 5 C’s are not insurmountable!
In addressing the 5 C’s, don’t be too surprised or disheartened if you come across obstacles along the way. This is not necessarily a deal-breaker; you just need to provide mitigates to the bank that will give them confidence the negatives can be overcome.
To really fine-tune the process – and greatly enhance your likelihood of success – The Finance Specialists can work with you to establish your estimated risk profile, and any issues relating to the 5 C’s, at the beginning of the finance journey. Once we know your risk profile, it is far easier to make sure we apply to banks that are the best fit for you and your situation.
With that analysis complete, it’s time to look at your risk profile and establish the potential businesses you have the capacity to buy. From there, you can narrow your choices down further, go out, make an offer and (hopefully!) get accepted. The loans process usually takes about 90 days, beginning the moment the offer is accepted and ending when settlement occurs.
Need help? At The Finance Specialists, we can guide you through the entire start-up process, from dream stage to opening day and beyond.