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How do I get that Loan?

We have previously written blog posts about planning and forecasting. As part of any plan the need for finance to fund business growth will become apparent. The worst thing that any business can do would be to follow a plan that suggests it needs funding, but ignore the funding piece!

But how do you go about getting this finance? As the Irish economy has grown, so too have the various finance products and providers. It is very important that the type of funding you look for matches with the business requirements. What I mean by this is that just like you would not buy a car using your Visa card (I hope!) you would also not fit out a production facility from a business overdraft.

Best foot forward

A lot has been said over the last number of years about how the banks are not lending and that it is impossible to get finance. While there is no doubt that obtaining finance from traditional lenders is far more challenging that in the mid 2000's, we have seen a levelling of the playing field in the last 12 months or so. A good plan, well researched and presented, with solid assumptions has a good chance of success.

It is therefore very important to put your best foot forward, invest the time and energy in putting together a good application and be responsive to bank requests for information. First impressions last. If you can get the lending officer to believe in your application it will make the whole process a lot easier.

Plan

The starting point for any finance application is to make a plan. Look at the business from the point of view that the new finance is in place and whatever you were buying or extending is in place also. Put together projections and budgets based on that scenario. It is very important that these projections are realistic and are not put together from an over optimistic point of view.

All projections are estimates but in arriving at those estimates you have used assumptions. It is important that there is rationale behind the assumptions. Don't just pull sales numbers from the sky. Link them to something tangible e.g. in a retail scenario how many units per week and at what average selling price will result in the targeted revenue. Ask yourself, does this number make sense to me? The same approach should be taken to budgeted costs. Include them all, including your own salary.

The assumptions used should be clearly listed at the front of the projections so that they can be assessed and challenged.

Options

So what are the options available? Let's consider the scenario of a business wishing to fit out a new production facility and also acquire new machinery. The unit is rented with a 10 year lease in place. The fit out finance required is €50,000 while €30,000 is required for equipment.

There are two separate items being financed in this example and therefore it would make sense for these to be funded separately. If using traditional banks the best type of finance for the property fit out would probably be a term loan facility while for the equipment lease finance could be used.

In relation to the term of the borrowings the fit out portion could be stretched to 7 years (maybe longer if that is needed to make it work) while the equipment leasing should be over a shorter period, possibly 5 years.

Loan repayments on €50,000 at 5% over 7 years would be €707 per month while repayments on lease finance of €30,000 over 5 years at 7% would be €594 per month. This is total repayments per month of €1,301 or €15,612 per year. It's important to know these figures early in your assessment. It is easy to find an online calculator that will give you these numbers based on scenarios you input.

Projections

Before you get to application stage you need to be satisfied that the plan works. Once the unit fit out is finished and the new equipment is in place what is that going to mean for the business numbers? Build the projections from there. If it is going to take time to ramp new sales following the purchase of the new machinery then build that into the projections. The projections should be done ideally for a minimum of 3 years and by month looking at the following profit & loss lines:

Sales
Cost of Sales
Gross Profit
Overheads (wages, rent, rates etc.)
Profit

The loan repayments will be funded from whatever cash that the business generates. Therefore, in determining if your business has a repayment capacity you need to establish what that number is.

Let's assume that the forecasted annual profit is €35,000 (and this also the cash generated). The total repayments on the example above are €15,612. This is the first calculation/ratio that will be looked at. The difference between the €35,000 forecasted profit and the repayments of €15,612 is €19,388 and this is referred to as headroom and the more of this the better as it allows for the risk that the forecasted profit will not be made.

In assessing the application these projections will be challenged or "what if" scenarios looked at such as:

  • what if sales are slower to grow than expected
  • what if the retail sales price has to drop by 5% to maintain sales volumes
  • what if margins are not as strong as expected

Next Steps

Once you have done initial work around the above with your adviser you are now in a position to make a formal application.

While the above steps are things the bank will do and expect, they really should be seen as essential and sounds steps to follow for your own peace of mind and confidence in your plan. It is always good to see things on paper (or a spreadsheet!).

In the above we have just looked at traditional lending. There are obviously other options and that is why talking things through with our adviser is essential.

As ever feel free to contact one of the team. We have assisted several businesses in 2017 to obtain finance to help their businesses grow.