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Applying For Business Finance

The National Bank

Most businesses need outside finance at some point in their development. Applying for business finance takes a bit more time and information than a home loan, as each business' needs are different. This guide outlines what your bank is looking for when considering your application for finance.

What will a Business Banking Manager look for?

When assessing your finance application, your Business Banking Manager will look to identify how your business will be successful, what profit it will generate, and whether it is able to meet your proposed loan repayments.

The first step - talk to us

In the early stages of evaluating whether you can purchase a business or borrow funds for another reason, you probably won't have all the information you need to put a full proposal to the bank. At this stage it's good to discuss financing options with your Business Banking Manager.

They will need an idea of the following:

The purchase or set up cost (including any additional plant or stock and GST if applicable)

How much you want to borrow
How much you will contribute yourself
Security available for the loan
Business profit available to service the proposed loan
Any existing debt and any other income sources

It's best to come and talk to your Business Banking Manager early. They will be able to let you know if your proposal is likely to succeed, or help you restructure your initial plans into a more bankable proposition. Your Business Banking Manager can also suggest professionals and advisors who can help you with some of the details. They can provide you with forms and planning guidelines that will help you prepare your formal request for finance.

What you need to do

You will need to provide your Business Banking Manager with hard facts and business projections, usually prepared with your own accountant. The Manager will want to clarify the details in person. The more research you have done at this stage, the better prepared you will be to answer any such questions. However, if you are not sure of something, say so, and then try to find out the answer. It is important to develop a partnership with your Business Banking Manager and other professional advisors as early as possible. Keep each other informed and recognise each other's needs. This will mean you will get your answers as soon as possible.

Putting together the Formal Finance Proposal

1 - What do you need to borrow?

First up, provide full details of what funding is needed and how it is to be raised. For new businesses, the following details are needed: Detail what cash and other assets (such as vehicles, plant and machinery) you are putting into the business and how you have accumulated this.

Goodwill	$	Cash Available	$
Fixtures & Fittings	$	Bank Finance Required	$
Stock	$
Professional fees	$
Plant & Equipment	$
Working Capital	$
Total Purchase Costs	$	Funds Available	$

Tips

The rule of thumb is to ask to borrow as little as possible, but enough that you don't need to apply for further funds for some time.

For new businesses ensure you cover your set-up costs and have sufficient working capital to allow the business to operate properly, both in the start-up period and beyond.

An experienced accountant can provide valuable advice on the costs you can expect to incur, and what to include in business expense projections.

2 - Your contribution

A Personal Statement of Financial Position will be required that outlines all you own (assets) and all you owe (liabilities). Banks usually have a standard form you can use. Also detail your income and living expenses. Include any external income (e.g. a partner's salary or rental income) which can be used to evaluate your ability to service any loans. You should also include details for any business partners. Outline how much you intend to take from the business to meet your personal borrowing and living commitments, and if you have any funds in reserve that you can put into the business if things do not initially go as planned.

Tips

Your Business Banking Manager will also want to see that you are putting your own equity into the business (this is commonly known as your "hurt money", because it hurts to part with it!). The minimum is usually 30% of the total needs of the business _ A loan on your house raised separately from the business loan is not equity - this is another business loan, and interest will be required to be paid on it _ Few businesses produce a level of payback that can finance borrowings of more than 70%.

3 - Security for the loan

Your Business Banking Manager will look at your proposal to see how the bank will get its money back. Your Business Banking Manager will want security to back the loan; this may be real estate or other acceptable business assets. Often small business owners secure the loan against their house, but investment and commercial property is usually acceptable. _ Bring with you details of any security offered for the proposed borrowing. Detail the valuation (from a Registered Valuer) for any property security (this will need to be provided in some cases).

For a commercial property, the bank will require a copy of the lease (if there is one), to verify rental income and other relevant issues that may affect the property.

If you borrow in the name of a company or trust, you will be asked to personally guarantee the loan.

The bank will also take a charge over the assets of the business itself, the stock, fixtures and equipment, etc.

4 - How will you run the business?

Your Business Banking Manager will need to know how you plan to run your business. For example:

Provide details of principals. Will you be an owner-operator on a full-time basis, or will family members or employees help with day-to-day management?

Provide details of operational structure. Will you operate as a company, partnership, sole trader or trust, etc? If using a company, detail your company shareholding and directors.

Advisors - Banks like you to get independent legal and accounting advice on both the business opportunity and the projected income scenarios before making a decision about your loan. Your Business Banking Manager will want to see that you have had your financial advisor or accountant review your income projections and purchase details. Your Business Banking Manager will check that you understand the obligations of the agreement you are signing (especially if you will be signing a lease), and that you have sought legal advice.

Tip

If you're forming a company, including an opening balance sheet as a useful snapshot of your proposed structure.

5 - Tell us about your experience - a brief résumé

Outline what skills and experience you bring to the business. You don't have to have been in the industry, but the bank will want to be satisfied that you have the aptitude, as well as the enthusiasm, for your chosen business. Outline on your ability and key personnel's ability to run the business:

Include your personal details and past business experience _ Include details about any business partners and key personnel

Include a history of any previous enterprises with which you have been connected
Outline all types of training and support that you will receive, either from the existing business owners (if buying a new business) or through your own endeavours.

With your permission, your Business Banking Manager may check your credit history.

6 - Tell the bank about your business

Provide details of:

Business Activity - what you sell or produce
Location (i.e. shopping mall, strip location)
Competitors
Market knowledge - trends, demonstrate your knowledge of what's happening in your market and industry

What promotional/local marketing activities are carried out.
Details of lease terms if applicable - include a copy of the lease where you can.

7 - Your business financials

Have you done your homework? Your Business Banking Manager will need to be convinced that your business can generate enough cash to pay business creditors, meet all loan repayments and provide an adequate income for you. What we will want to see:

Actual profit and loss statements (Statement of Income and Expenditure) for at least the last two years for existing businesses

Profit and loss projections on a monthly basis for at least two years (for new and existing businesses)

Cashflow forecasts on a monthly basis (for new and existing businesses)

Profit and loss, and cashflow projections are usually prepared with the aid of your own accountant. Be as specific as possible. Please comment on:

Why you believe your sales are achievable
How you will achieve your projected gross profit margins Key expense items and any differences in expenses from last year or the previous operator.

Tip

Make sure you allow for the extra costs in achieving higher sales. And be realistic with terms of trade - if an existing owner collects debtors on 90 day terms, these are usually industry norms and unlikely to change.

8 - Come in and see us

Make sure you approach a specialist Business Banking division. They will have the right knowledge and experience to help you. The Business Banking Manager will consider your application carefully, and will talk through alternatives with you.

Tips

Send in your proposal in advance so they have time to gain an understanding of it before you arrive.

Involve your accountant or other advisers if you feel they add value, but be prepared to answer questions yourself. This will help demonstrate that you fully understand the business proposal and running of the business.

Checklist

Bring your funding proposal containing:

What funding you require and its purpose
Structural details of your business and how it operates
A statement of financial position
An outline of the security for the loan
Financials including profit & loss, plus cashflow accounts or projections, plus comments on related issues.

In addition you may need to bring:

Your company's opening Balance Sheet
A copy of your business lease _ Business sale and purchase documents
Valuation from a Registered Valuer of assets offered for security (i.e. property valuation)

Details and verification of other income sources (payslips, rental property leases)
Copies of life insurance policies.

Check with your Business Banking Manager what you need to bring before you go to your meeting.

For further information contact The National Bank

Disclaimer: This material is provided as a complimentary service of The National Bank of New Zealand Limited (�bank�). It is prepared based on information and sources the bank believes to be reliable. Its content is for information only, is subject to change and is not a substitute for commercial judgement or professional advice, which should be sought prior to acting in reliance on it. To the extent permitted by law the bank disclaims liability or responsibility to any person for any direct or indirect loss or damage that may result from any act or omission by any person in relation to the material. Copyright 2002 The National Bank of New Zealand Limited. All rights reserved.