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Wednesday, September 30, 2020
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What you need to do to get bank funding

In order to get funding from them to buy a business, there are three key areas that come into it: the equity you will put in and the deal structure you propose, the plan that you have and your own “person risk”.

Equity

The equity that you have available (and are prepared to put in) is the most critical part of any bank deal. It is helpful early on in a deal to work out the funding you will need as there are limits to what banks can lend out.

For example, owner-occupied houses are usually limited to 80 percent of the value. Generally, banks cannot lend more against than 50 percent of the goodwill.

Plant and equipment can usually be borrowed against relatively highly. Once you know what this adds up to and have added any cash you are putting in, you will know what your limits are. Note this does not mean it is affordable at this stage – just whether the deal is potentially bankable.

The Plan

Banks want to understand the risks and opportunities of the business. They need to know why the business is a good investment for them.

Part of the equation is demonstrating how the business has performed in the past. And importantly now you need to explain why the past is still a good guide on future performance.

Many businesses have been (and will continue to be) affected by Covid-19. Banks need to know your plan to deal with this challenge. So having a business plan that you can understand and explain, and that the bank can feel confident is deliverable, is critical.

Of course, part of the equation in getting bank finance is proving affordability.

The bank will not fund you into something that you cannot pay back. You will need robust forecasts that directly tie into the business plan prepared by a chartered accountant.

Importantly, the bank needs to understand the assumptions and have confidence in what has been prepared.

I helped a business buyer recently get funding who came to me after their first accountant was unsuccessful getting funding over the line. The accountant had prepared a good-looking forecast – but it was not clear to the bank that they had really understood the cash needs of the business.

Person risk

This is now a very real factor. Banks are putting more weight in credit decisions on your personal history, how you present and the quality of your advisers.

If you go to the bank and you have not yet involved your accountant, etc, you may not present in the best way possible.

If you build a good team of advisors around you, the banks take comfort from that as they know you will be getting reliable advice.

Using the right people can also mean the banks are able to relax slightly in their review process. Bankers are busy people – and if you can present something in a format they are used to and in a way they understand it saves them time, and builds their confidence that you will deliver what you say you will.

Finally, be aware that getting bank finance takes more time now – a 15-day due diligence clause is unlikely to work for many deals (only for buyers with plenty of equity). I suggest extending this to at least 25 working days.

If you give yourself time to prepare a proper plan and build a team of reliable advisers, you will have a good chance of getting that finance approval.

Tom Beswick
Tom Beswick
Director at Ingham Mora Chartered Accountants in Tauranga, is a business advisor who specialises in buying and selling businesses. He can be contacted on 027-5744- 019 or tom@inghammora.co.nz

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