Dealing with a bank is a way of life for most businesses. This article will discuss how you can get the most from the process and how you might effectively prepare. It will discuss what the banks are looking for when they assess a loan application, and how you might put your best foot forward.
While banks are in the business of lending money, and the lending environment is very competitive, you need to ensure that your lender will want to do business with you.
Initially, the bank will be making objective assessments of your business. This is essentially the type, and value, of any security you are able to offer, and your ability to service the debt.
When assessing your business, the bank will need to understand the following:
- Track record. What performance has the business achieved in the past?
- What is your business plan/business model? Does it make sense?
- Do you have a good understanding of production, financial performance and the realities of debt servicing?
- Can you achieve what you say you can?
- Do the numbers stack up?
- Are your assumptions realistic?
- What are the risks to the bank?
Essential documents used to make the assessment will include:
- Accountant prepared financials (minimum of 3 years, preferably 5)
- Cash flow budget or forecast, including assumptions. Bank will usually do their own sensitivity analysis
- Last 6 months bank statements (new customers)
- Income Tax Returns
- Short and Long term business strategy
In addition they will normally require livestock schedules/details, rates notices, formal property valuations (if available), and a statement of position or balance sheet.
Its worthwhile getting to know a few of the local relationship managers; more and more, banks will want to understand you business as well as they can, and that will include the assessment of the people in the business. The bank is likely to form a view on you and your family, in terms of how professionally you conduct your business, how well you know your business and if you understand and can articulate your direction. They will also want to know “how good a farmer you are”. This is a good time to tell the bank what previous experience or formal qualifications the members of the business have.
This subjective assessment of the business is usually difficult to describe and is almost a gut feeling from the relationship manager. However, this will form an important part of whether you get financed and what sort of deal is offered.
A Business Plan is an important document that can bring together all we have talked about in one place. In addition to its usefulness when seeking finance, the Business Plan is also invaluable in communication with the farm business and family.
The main role of the business plan is to define the strategic direction of your business, provide a level of financial and operational direction and guidance as to how the business will perform and to allow the business owners/investors to track and measure the performance of the business.
A Business Plan should include the following format and sections:
- Introduction/Background (the story and history of the farmers and the business)
- Strategic Plan
- Whole Farm Plan
- Financial Management Plan
- Primary Production Plan
- Produce Marketing Plan
- Environmental Management Plan
- Infrastructure Management Plan
- Human Resource Management Plan
- Risk Management Plan
Business analysis, budgeting, and planning are all considered “best practice” and carry multiple benefits to the business, owners, family and staff.
In addition, these practices will be invaluable in improving your relationship with your current lender, attracting a new lender and potentially increasing the chances of achieving the best possible deal.
Tim Bateman (ORM Bendigo).