Borrowing money for your business – what you need to know

A guide by Peter Cooper

Small business owners, before borrowing from the bank, we advise you to create a document that covers the history of the business that can be updated over time and is readily available to give to your banker when required. The document should follow the template as follows:

1, How long has the business been operating?

2, What is your management experience in running the business?

3, What is the vision for the business?

4, Do you have a business plan/SWOT (strengths, weaknesses, opportunities, threats) analysis/marketing strategy?

5, Who are your major competitors?

6, How are you driving productivity and efficiency of operations?

7, How are you measuring accountability?

8, How are you measuring the actual performance against the plan?

9, What would happen if you were sick, died or had a disability?

10, How often is the accountant involved in the business on an ongoing basis?

11, How old are your motor vehicles and equipment?

12, How many employees?

13, Is the income stream seasonal in any way?

For those who operate in a business where your revenue is generated in an irregular fashion, it is imperative to let the bank know that thought has gone into cover during the downtimes. That is to say that your overdraft limit is sufficient to cover these down periods so as not to incur additional interest, fees or issues around cash flow that may cause the bouncing of a cheque.

14, How about debtors?

You should make mention in your document of the break-up of debtors by age (30, 60, 90+ days) and comment on whether or not these debtors are realistic in terms of payment and that your provisions are realistic.

15, Rental of premises.

Banks will always ask for a copy of your rental agreement and the reason is that you may be in the third year of a five-year lease. The bank will want to know if you have sought clarification as to whether or not that lease will be renewed at the end of the five-year period and have you given consideration to what the cost would be to lease alternate premises if the lease was not renewed. In other words, you could be paying e.g. $15,000-$22,000 in rent or alternatively it may come down from $15,000 to $10,000. In either case, the bank would factor these figures in to ensure that your capacity to pay is never put under duress.

16, When is GST due or is the tax paid up to date? Has money been put aside to make these payments if and when they fall due?

17, Have any prepayment made during the accounting period?

Furthermore, before visiting your bank, you will also need to provide a cash flow diagram, for example:

This diagram shows how the revenue is dispersed across various entities, which allows the banker to quickly understand the cash flow of the business.