There are four things start-up entrepreneurs need to get money out of the banks in the post-GFC climate: a proven idea, a business plan and a track record are a start. And the fourth? Put a mortgage on your house.
Times are tough for start-ups. Venture capitalists are not around and private equity, decimated by the global financial crisis, is now targeting franchises.
Angel investors, a growing source of money supply, come with their conditions, usually a spot on the board and a hand in running the company.
The banks have tightened up on lending. New research from JPMorgan and Fujitsu reveals banks are more willing to finance SMEs, including start-ups.
But in this market, start-ups need to address a list of risk concerns that has been growing since the financial crisis.
That leads many entrepreneurs to say the banks are not interested in lending. The banks however say they are very much in the game.
They’re just not handing out money for nothing. Start-up entrepreneurs will need to be prepared and answer key questions.
What the banks are looking for
Martin North, executive director industry group, Fujitsu Australia and New Zealand, says banks are now willing to lend but the approach has changed since the financial meltdown.
“Post-GFC, the banks are a little more wary about some of the more adventurous propositions,’’ North says. “They are looking for more detailed business plans.”
“They are looking for stuff less at the risky end and if you tick those boxes then you will find the banks are very happy to help.”
“But if the proposition is new to the world, if it’s not backed by a business plan, if it’s not backed credentials, then it’s a lot harder than it was pre-GFC.”
To get funding, he says start-ups need to build a business plan, make sure that they have done their homework and understand the market they are tapping into. They also need a solid track record.
“You need to understand a little more about the way the banks think about the business,’’ North says. “All those things together mean the barriers to entry will be higher. It doesn’t mean it’s impossible, you just need to understand a bit about what lenders need to meet the requirements.”
“A proven business idea, a track record and a business plan would be the three things I would put on the table.”
The struggle for funds
But some entrepreneurs say that’s just too hard. Brendan Lewis, a serial technology entrepreneur who founded among other entities Ideas Lighting, Carradale Media, Edion, Verve IT, Flinders Pacific and L2i Technology Advisory, says most start-ups have to resort to bootstrapping, where they fund it themselves. He says banks make it too hard for start-ups.
“The banks will want your house and a lot don’t have a house,’’ Lewis says. “Or if you do, they don’t want to put that up.”
As for the proven track record, Lewis is openly scornful. “If your name is Richard Branson, they will lend you money. If your name is Evan Thornley, they’ll do it.”
Still in the game
But the banks disagree. Bernard Tanner, chief operating officer of local business banking for the Commonwealth Bank, says banks are looking for new businesses to support.
“We are still in the market and I can assure you, the competition between the four majors to win new business is as fierce as it’s ever been,’’ Tanner says. “What we are looking for is quality new businesses, and there are some industries and elements of the economy that have a greater risk than others.”
With start-ups, it’s all about evaluating the risk. “There is the advertised interest rate for a commercial facility and then we will assess the business across a range of criteria and we will add a margin on top of the advertised rate,’’ he says.
He says the bank will grill the entrepreneur. Have you had experienced running a business before? Do you have a business plan? Is there a marketing plan? Do you understand the cashflows of this business? If it’s a franchise, do you understand you have to make payments to the franchisor? Do you have a restricted district or are you competing against other franchises? How are you going to be paid? Are you going to have an online presence? If you are selling goods online, how are you going to confirm delivery and payment? Do you have an inventory management system?
He says some entrepreneurs give up when they are bombarded with these questions. Others hang in.
“The more prepared a customer is around the purposes of the facility, how they are going to repay the loan and manage the business are all the signs all the banks love,’’ Tanner says.
He says most start-up entrepreneurs getting loans put their homes up as security. “If there’s no home, it becomes a cashflow lend so it’s unsecured and unsecured in the current market means less money to be lent at a higher rate.”
Commonwealth Bank loans secured by residential property come in at 7.86%, an overdraft is 8.76%, loans secured by non-residential property are 9.49% and corporate overdrafts come in from 10.39% to 11.09%. These rates are comparable across the banks.
He says many small start-ups prefer to deal with smaller banks. Some might even find the smaller banks are willing to take bigger risks to build their business. Tanner says arguments about the quality of those loans will run forever.
Sian Lewis, Westpac general manager for the SME segment, says Westpac has an 85% approval rate for loans. Still, that approval rate also covers existing business. Lewis was unable to quantify the proportion of start-ups in that number.
“We look at the same things as we look with an existing business that wants to borrow money and this what do you want the money for and what makes you feel that you will be able to pay us the money back,’’ Lewis says.
She says while some entrepreneurs can put up their home as security, others can put up their shop or equipment. Westpac does not make unsecured loans.
ANZ’s Nick Reade, General Manger for Small Business recommends prospective loan hunters to develop a cashflow plan.
“Use your cashflow forecast to work through whether you need lending or you can manage without or just small amounts of working capital, this can help take the pressure off the start-up phase of your business and borrowing can be used later when you want to fuel more growth,’’ Reade says.
Glenn King, NAB’s Executive General Manager for Small & Emerging Business says the business plan and cashflow analysis are essential.
“The first step that entrepreneurs or a start-up business need to do prior to seeking funding is to research the viability of their business idea and ensure they understand the industry they plan to become a part of. They need to develop a thoroughly researched business plan that clearly identifies what the key opportunities and challenges may be,’’ King says.
“Once we have a clear idea of the customers’ business proposition we spend some time working to understand the business plan, the customers’ vision and the necessary steps they need to follow to achieve their business goals.”
“We work with our customers on a case-by-case basis in order to determine the best solution for their business needs and as such, a customer’s business loan is also priced on a case-by-case basis.”
“Price takes into account a variety of factors such as security, risk, maturity of business, cashflow expectations and the industry the business operates in. Costs and terms of finance are determined by equity, cashflow expectations and supporting security, for example: residential property, commercial property or equipment and plant.”
“Our Business Options variable rate product, which has an indicator rate of 7.33%, is quite popular among our small business customers.”
- Make an appointment. Don’t just assume you can walk in off the street and ask for a loan.
- Have a business plan with full details including cashflow projections.
- Do your homework. Research the industry you are going into carefully covering everything from economic conditions, consumer behaviour and competitors.
- Use a good accountant to prepare a set of financial statements for your business. That includes a business plan and a personal balance sheet. If it’s possible, have the accountant accompany you to the bank. They can answer the hard questions.
- Be honest and ask for the amount you really need.
- Be prepared to put up some security. That could include your home. Think about it this way: if a businessman is not prepared to put his assets on the line, why should a bank?