Insider guide to getting finance

Jacqueline Gray felt like she was walking the plank when she set up a small business hiring out homemade pirate costumes.

She had left the security of a teaching job to turn her hobby into a business, sewing children’s costumes at the kitchen table at night and renting them out for parties in the day.

In the early period, the single mother-of-two did not qualify for a business loan because she did not have any collateral.

With little savings and mounting bills, the saving grace came months later when Bankwest suggested she cover her business needs with a credit card and a personal loan totalling less than $10,000.

It has been just over a dozen years since she started her business — aptly named Walk the Plank — and the thriving South Perth costume hire shop is now turning over nearly $1 million a year.

While setting up a business on a credit card is a controversial move, Ms Gray says it gave her a chance she would not have otherwise had.

She says borrowing difficulties are a common ordeal for retailers because they cannot use orders as collateral, unlike wholesalers who can put them up as security.

In her case, she also fell short of all other acceptable forms of collateral, which includes tangible assets like buildings and homes, and softer assets such as stock and personal and corporate guarantees.

She is grateful that the high rates forced her to live and work within her means.

Her stringent approach continued even after cash flow improved, and she continued her focus on minimising debt.

She advises other entrepreneurs seeking to expand their operations to do so by pouring their profits back into the business rather than constantly reaching for more credit.

But for those who need a business loan, there are ways to shore up your chances of a successful application:

How do lenders calculate how much a small business can borrow?

Bankwest’s head of small business, Louise Ardagh, says lenders make a complex assessment of an applicant’s financial and personal circumstances when deciding on the size of a business loan.

This includes the age of the business, its revenue and profits, the owner or operator’s experience, existing business and personal borrowings, income from alternative sources, personal living expenses and security.

National Australia Bank says lenders also consider an applicant’s business model, and examine it for faults such as the common tendency to hold too much inventory.

“A good lender will look at the root cause of the borrowing, ” NAB’s general manager of small business David Bannatyne says.

The impact of a business model on loan size was highlighted by a recent case of a gym owner who asked to borrow $30,000 to cover a cash flow problem.

The request was rejected after the bank assessed the business model and realised a problem in the cost structure.

Mr Bannatyne says the owner had undermined staff incentive to grow the business by paying them set salaries, rather than pinning wages on the number of classes and personal training sessions they conducted.

The bank suggested that he implement an incentive-based payment system and call on employees to sign up two new gym members a week.

The result was an increase in both business revenue and staff pay.

“The gym was making less than 10 per cent profit in November last year, and now it’s making 25 per cent profit, and that’s without borrowing a single cent, ” Mr Bannatyne says.

What helps a small business to qualify for a loan?

The Small Business Development Corporation says the key to qualifying for a loan is a good credit history, decent collateral and a business plan that mapped out repayments.

SBDC business advisor Sonya Kanban says plans should forecast best, worst and middle-ground scenarios, and should include three years of business activity statements and recent invoices or quotes that support projections.

The applicant should pay all outstanding debts before seeking a loan, even if it involved setting up an instalment plan.

The business plan should list all assets and liabilities. A general rule of thumb was that applicants with an asset pool 1.5 to two times greater than their liabilities were well-placed to get a loan, she says.

“You need to install confidence that you will be successful in what you are doing, ” she advises.

“Work on your business plan to show what your strengths are.”

Ms Kanban says applicants should ask their bank for a business plan template, and if uncertain, to seek help from organisations like the SBDC.

NAB head of small business for WA Craig Swinburne says lenders looked favourably on SME’s that utilise professional advice from business mentors, accountants or lawyers.

He says applicants can support their claim by demonstrating they are of good character and had good business experience.

Ms Ardagh says applicants should demonstrate a clear understanding of their personal and financial circumstances.

A pre-existing relationship with the lender could help shore up an applicant’s chances, because it could prove suitable business conduct.

ANZ says personal guarantees are helpful.

In some cases they are mandatory.

“We look favourably at applicants who are willing to put skin in the game, so to speak, ” an ANZ spokeswoman explains.

“These are people who are prepared to put something into the business, either by way of cash or some other collateral, because they don’t expect their bank to take all the risk.”

Commonwealth Bank’s Adam Bennett says lenders look favourably on those with previous business success, and who demonstrated business acumen and a good debt to equity ratio.

Westpac State General manager Larissa Shepherd says start-ups with no credit history can still qualify if they have strong security, due diligence and can provide either historical data or a forward projection, preferably prepared by a professional team.

What is likely to disqualify you from getting a loan?

Ms Ardagh says applicants who do not tell the truth will get caught out because lenders seek evidence of their financial position.

“If a customer displays incorrect or false information, it would indicate they are not serious and not interested in working within acceptable guidelines, ” she says.

SBDC’s Ms Kanban says lenders often searched online for customer testimonials and other examples of business reputation.

While bad publicity will not automatically disqualify an applicant from getting a loan, she says applicants can shore up their chances if they can explain how to prevent the problems from being repeated.

Outstanding loans, a history of unpaid debt, or going back to ask a lender for more money shortly after a successful loan application, were also deemed black marks against an applicant’s name.

“If you go back and ask for more, they may not look at you favourably, ” she says.

“It may look as if the business is not going well, or not performing, or that you were not properly prepared.”

ANZ says someone who has previously declared bankruptcy was unlikely to get a business loan.

Mr Bannatyne says poor business proposals will not get support.

He cites the example of hard copy encyclopedia sales in an era of online references.

Someone of poor character, such as an outlawed bikie gang member, will also struggle.

He says a refusal to provide a personal guarantee could undermine an application.

“If someone says I don’t want to bank my home on this business, it would be like saying I own a plane but I’m not going to fly on it myself, ” he says.