Monday 22 January 2018

There's more than one way to get a loan, keep knocking on those doors

Louise McBride

Louise McBride

US billionaire Donald Trump once said that sheer persistence is the difference between success and failure.

The billionaire's advice could be well worth following – as the improbably coiffured tycoon is one of the best known real-estate entrepreneurs in the world and is worth about €2.6bn.

If you're planning to set up your own business but are struggling to raise the money for it, his words particularly ring true – you won't get anywhere if you give up at the first hurdle.

In the second of a two-part series on raising the money you need to become your own boss, the Sunday Independent finds out what you need to do to convince a bank, business angel or other individual to hand over the cash for your start-up dream.

GETTING YOUR BANK ON SIDE

Banks are turning down about six out of 10 loan applications from small businesses, according to the Irish Small and Medium Enterprises Association. As start-ups are usually considered riskier to lend to than established businesses, would-be entrepreneurs are no strangers to closed doors when looking for money from banks.

Banks, however, want to lend money to small businesses, insists Gerry Prizeman, head of small business and agriculture with Bank of Ireland.

"We have a very significant vested interest in trying to make sure we get the money out," said Prizeman. "But we won't give it out if we don't think we'll get it back.

"The starting point for any banker is to establish a borrower's repayment capacity – we need to be convinced that a borrower has the ability to repay a debt."

A poor credit history will clearly go against you if applying to a bank for a business loan. Unless you're a serial entrepreneur, however, you're unlikely to have built up much of a track record repaying business loans if you're just about to set up your own company.

So how would you convince your bank that you can repay what you borrow?

Having a credible business plan and realistic cashflow projections (which show how much money you expect to flow in and out of your business each month) behind you is a good starting point.

"There's no point coming in and saying that you're going to generate sales figures that have never been seen before by similar businesses," said Prizeman. "Your projections have to be grounded in reality.

"So if you're going to open a restaurant 100 metres down the road from another one, and you're expecting to generate two-and-a-half times the returns of the restaurant up the road, you need to explain what it is about your business that makes it different to the other restaurant – and able to generate more than twice the returns."

'We have a very significant vested interest in trying to get the money out there. But the starting point for any banker is to establish a borrower's repayment capacity. Obviously, we won't give it out if we don't think we'll get it back...'

Your bank also needs to be confident that you can manage your business's costs – as well as any profit you make, according to Prizeman. Having a good financial head in the business, or an accountant you can lean on for advice, is a must.

Putting your own money into your business is another strong card to have on the table. "The bank won't want to own any more of your business than you do," said Prizeman.

Expect, therefore, to put the same amount of money into your business as you are hoping to borrow. This money could come from your own savings, your family and friends, or any partners who are investing in your business.

If you've raised money for your business from the State, this should also help convince your bank to get on board – but banks will usually still expect you to stump up some of your own cash.

"We like to see a commitment from the owner to put their money into play as well," said Prizeman.

GOING FOR A SPECIALIST

If you're having no luck raising money from a mainstream bank, you could try a specialist in business finance.

Close Brothers Commercial Finance, for example, offers asset finance, where you can raise money to buy equipment or machinery for your start-up. To persuade a commercial finance company to lend you money, you'll need a "good-quality business plan with concise financials", according to Adrian Madden, regional sales director with Close Brothers. "Another key part of a business plan is the quality of the promoter [the person setting up the business] and the management – and what experience they have."

The loan-to-value ratio (ltv) – the percentage of the cost of the equipment or machinery that you are looking to borrow – is also key to any deal, added Madden.

"The lower the ltv, the better," said Madden. "If something is going to cost €100,000 and we're being asked to finance €50,000, that kind of ltv is very attractive."

BUSINESS ANGELS

A business angel could be your best bet if you're struggling to raise money for your start-up venture.

Business angels are successful entrepreneurs who invest money in companies that are in the early stages of development. They generally look for a stake in your company in return for their investment. While it's important to look for a business angel with a strong commercial track record and good business contacts, you'll also need to convince the angel that your business is worth backing.

So what are business angels looking for? "You want to see someone who is grounded in reality – but ambitious and with the substance to show that they can create growth for the business," said John Phelan, national manager with the Halo Business Angel Partnership in Dublin.

"If you've experience in the market you're going into, that will stand to you. If you're planning to set up a technology-oriented start-up, angels like to see someone who understands the technology – and the marketplace."

GET THE CROWD BEHIND YOU

Crowdfunding – where you raise money from a large number of individuals to finance your business venture – is another alternative to bank loans.

Peter O'Mahony, the founder of the Laughter Lounge comedy club in Dublin, runs LinkedFinance – a company that offers crowdfunding to Irish businesses.

"LinkedFinance has been up and running since last March and we've lent to 34 businesses so far," said O'Mahony. "The typical business which raises money through us is someone who has had a bad experience with their banks."

You can raise between €5,000 and €50,000 through LinkedFinance and you must repay your loan monthly over three years.

To borrow money, you first register with LinkedFinance.com. The registration fee is €70 plus Vat. You then complete an online application form. If your application is approved, your loan is advertised on the website. "People then bid for your loan and offer to lend money at different interest rates," said O'Mahony.

The average interest rate on loans raised through LinkedFinance.com is 8.9 per cent, according to O'Mahony.

Once you have loan offers to cover the full amount you need to borrow, you have five days to accept those bids and enter into a loan contract. You don't have to sign the contract. If you accept the bids and enter a contract, you pay LinkedFinance a completion fee of 2.5 per cent of the total value of the loan.

You must be actively trading for at least two years to be able to raise money through LinkedFinance – so if you're only in the early stages of setting up your business, you probably will not be eligible. And if you are eligible, you will still need to get your request approved before you can invite individuals to lend you money.

"Ideally, we're looking to see that the business has borrowed in the past and has a track record of repaying that debt," said O'Mahony. "We do everything a normal bank would do including credit and anti-moneylaundering checks. We need bank statements for the last six months showing the health of your business. We're not looking for proof that someone has made a major profit when going through these statements – we're looking for someone who can show that they have run a business well. We also need to see a tax clearance cert so we know the entrepreneur's tax affairs are in order."

LinkedFinance will participate in Fingal Enterprise Week 2013 – an entrepreneurial event organised by Fingal County Enterprise Board, at the end of this month.

Like many crowdfunding platforms, LinkedFinance is not regulated by the Central Bank.

"Consumers should always note that where they deal with any firms that are unregulated there is no recourse to the Financial Services Ombudsman or any statutory compensation schemes," said a spokeswoman for the Central Bank.

"In general, crowd-funding platforms tend to be structured in a way that means they do not fall under the remit of the Central Bank. It will depend on the structure and business model in each case."

Sunday Independent

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