FINANCE FOR THE FUTURE In association with AIB

Ken Hostetter is a Senior Manager, Customer Strategy with AIB Bank

You can finance your family-run business by thinking like a banker says Ken Hostetter.

Family owned businesses dominates the SME sector in Ireland. It is estimated that approximately 90% of the indigenous business sector in Ireland is family owned and managed and accounts for approximately 50% of national employment.

ACCESS TO FINANCES

A common issue faced by many business owner managers of family owned businesses is getting access to adequate finance. Whether your family-run business is in it’s early stages or been in existence for a number of years, a common thought is, “if we only had access to a little more finance to grow our business.” Raising money is a common hurdle you’ve got to overcome to become a successful entrepreneur.

While poor management is cited most frequently as the reason businesses fail, inadequate or ill-timed financing is a close second. Making the wrong financing decisions can be painful. It is important to avoid common entrepreneurial financing mistakes like securing the wrong type of financing, miscalculating the amount required, or underestimating the cost of borrowing money.

THE RIGHT CHOICE

Getting a loan for your business can help you through your early stages. Financing is equally important when advancing to the next stage or when making plans for expansion. But do you know how to go about getting a loan? It really does help if you think like a banker.

A simple rule of thumb to follow when assessing which finance product to use is, “the longer the life of the asset being purchased the longer the term of the loan.” Ultimately, one of your key roles as the business owner or manager is to ensure your business gets the right finance for its needs. Your banker or financial adviser is there to simply help you achieve this goal.

CRUCIAL QUESTIONS

BEFORE PURSUING FINANCE FOR YOUR FAMILY RUN BUSINESS, ASK YOURSELF THE FOLLOWING:

• Do you need more capital or can you manage existing cash flow or savings more effectively?
• How do you define your need for capital? Do you need money to expand or as a cushion against risk?
• How urgent is your need? You can obtain the best terms when you anticipate your needs rather than looking for money under pressure.
• How great are your risks? All businesses carry risks, and the degree of risk will affect cost and available financing alternatives.
• In what state of development is the business? Needs are most critical during transitional stages.
• For what purposes will the capital be used? Any lender will require that capital be requested for very specific needs.
• What is the state of your industry? Depressed, stable, or growth conditions require different approaches to money needs and sources. Businesses that prosper while others are in decline will often receive better funding terms.
• Is your business seasonal or cyclical? Seasonal needs for financing generally are short term. Loans advanced for cyclical industries are designed to support business through depressed periods.
• How strong is your management team? Management is the most important element assessed by finance sources.
• Perhaps, most importantly, how does your need for financing connect with your business plan? If you don’t have a business plan, make writing one a priority. All finance sources will want to see your business plan for the early stages and growth of your business, and compare that with what you originally projected.

THE SIX C’S

AS YOU GO THROUGH THE PROCESS OF GETTING A LOAN FOR YOUR BUSINESS, CONSIDER A SET OF CRITERIA USED BY LENDERS TO EVALUATE SME APPLICANTS. Character The career history, qualifications, management experience, credit and repayment history.     Capacity to Pay The ability for the business to generate enough funds to keep the business trading, earn a living for the business owner and repay any outstanding debts.     Capital The amount of capital that already exists in a business is an important factor. It is an excellent indicator of financial stability and risk for a banker.     Collateral An asset owned by the borrower, but promised to a banker against non-payment of the loan. The amount of collateral varies from lender to lender. The closer the collateral value is to the loan amount, the more comfortable the lender will be that the loan will be repaid and you may be able to negotiate a better interest rate.     Conditions General economic, geographic and industry conditions are important factors that impact lending decisions.     Confidence A successful borrower instills confidence in the banker by addressing all of their concerns on the above Five C’s. Their loan application should send a message that the company is professional, with an honest reputation, a good credit history, reasonable financial statements, good capitalization and adequate collateral.