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Finance All Your Needs

Banks and loan institutions are in the business of lending money: they are not in the business of repossessing things. For this reason one needs to give the bank or institution lots and lots of documentation to place them in their comfort zone. 

Let's face it, far more loans have been turned down from lack of information than from too much information. And by providing all the required information, you'll help speed up the loan process.

One of the biggest mistakes that most consumers make is to only contact one lender. Consider this - would you only go to one dealership if you were buying a second hand car? Mortgages, like car prices, are negotiable. You need to shop for a mortgage and request comparable quotes from various lending institutions. By shopping your loan with different lenders and negotiating the rate, you can get the best possible loan and save lots and lots of money.

You should also take a look at our About Home Loans page. It is more focused on home loans, but it is well worth reading. It also has some very useful links to loan institutions that could be of help to you.

Whether you intend raising finance for a home or a commercial venture, and whether you intend dealing with a commercial bank, private individual, building society, mutual fund, insurance company, and/ or a pension fund, rest assured they are going to require their protection secured by a mortgage on the property (and/ or some part of another property) or by other substantial protections. Furthermore, it is not enough to simply satisfy the potential mortgagee (lender) that the property is worth more than the amount that will be outstanding. They are going to need comfort in your ability to repay without any problems. 

If you're an individual borrowing to finance a home the lender generally looks at things like:

•  How long you've lived at your current address

•  Your job or profession and how long you've been in it

•  Your financial obligations (debt-to-income ratio)

•  Any late payments

•  The amount of credit you have outstanding

•  The amount of credit you are using

•  The amount of time you've had credit established

They also take into account current balances on accounts, too few bank revolving accounts, too many bank revolving accounts, number of accounts with balances, number of accounts opened in the last 12 months, length of time accounts have been established, amount of past due accounts, number of delinquent accounts, too few accounts rated "current," recent derogatory public record of collection, past due balances, number of credit inquiries made and so on. In fact, it's often been said that you have to prove to them that you do not actually need the funds before they'll consider giving you the loan!

Clearly reflecting your ability to repay is very, very important when borrowing money to help finance items of a capital nature (like a building) - lenders actually prefer to invest their money in assets that will generate income, such as working capital. After all, they are in the business of lending money, they are not in the business of repossessing things. In fact, all lenders want exactly what you want - a smooth, successful, no-hassle transaction.

Here are some typical questions that will be going through the banker's (lender's) mind as he or she talks to you about company finance:

  • How much money do you want and what do you need it for?

  • Is your business profitable enough, and does it have enough cash flow to service the debt? (a detailed cash flow projection will need to be prepared).

  • Is there a reasonable balance between debt and equity? (the bank will only take risks if you do and like the entrepreneur to be at risk as well. After all, why should they take all the risk?).

  • Does your business have enough collateral to cover the loan?

  • What backup options have you got if something goes wrong in the business?

  • What are the risks associated with the industry in which you are involved? 

  • What does it take to succeed in this type of company?

  • What is the growth potential for the business?

  • Is the location appropriate?

  • How do you plan to, or compete, against the other businesses in your industry?

  • What are your and your business's strengths and weaknesses?

  • Do you have reasonable working experience in this field?

  • Do you have the skills and background necessary?

  • Is there a large enough market for your products/services?

The banker will also be wondering:

If I ever needed to sell this business, 

  • Where would I be able to find a potential buyer willing to pay a premium for this business?

  • Is there any untapped potential for the business that a new owner could take advantage of?

  • If the new owner had more capital, could the business grow more rapidly?

  • Are there new markets that could be entered?

  • Could costs be reduced and therefore profits increased?

Here are some tips to help convince the cash-conscious banker or lender

  • Have a sound business plan which should include detailed and conservative financial projections, including pro-forma income statements, balance sheets and cash flow forecasts.

  • Invest your money - show that you are taking risks too. The more you invest, the less risky the bank will perceive the venture to be, and the less conditions and collateral will be attached to the loan.

  • When presenting your loan application to the banker, it is important to:

    • Present yourself professionally and punctually at the interview.

    • Learn the language of finance - surprisingly few entrepreneurs can speak it, so the financially literate entrepreneur has a real competitive advantage in the market for finance.

    • Make sure you are familiar with the contents of your business plan, especially if your accountant prepared most of the figures for you. If you are not confident to present the figures alone, take your accountant with you.

    • Be open and frank during the interview.

    • Remember you are trying to sell yourself and your business to the financer, so be confident, enthusiastic and well prepared to justify your request for the loan.

Here are some key issues for loans:

  • Due date for payment: You need to formulate a reasonable schedule of payments according to your cash flow forecast.

  • Interest payments: You need to ensure that your debt servicing levels are acceptable to both your business and your bankers.

  • Loan fees: Some loans and overdraft facilities require the payment of upfront establishment fees. Be sure that you know the details and factor this into your cost of financing.

  • Defaults: Find out what procedures are adopted by the bank or institution in the event of defaults.

  • Collaterals: Find out what additional security (other than the mortgage) the bank or lender will require to entertain the loan.

  • Co-signers and Guarantors: Many financial institutions will require that someone of good standing signs a personal guarantee for the debts of a small business. You need to get clarity on this early in the negotiations - you don't want to be running around looking for personal guarantors when everything else is already in place.

  • Types of collateral / security: 

  • Accounts receivable i.e. cession of debtors.

  • Real estate and buildings - often the only fall-back security available is in the form of a personal guarantee backed by assets, usually the family home. This can have the effect of wiping out the advantages of any type of limited liability.

  • Savings / investment accounts

  • Insurance policies

  • Merchandise and inventory

  • Equipment and vehicles

  • Guarantees from third parties

  • Shares and Unit trusts

Here are some hints on the Business Plan

It's pretty obvious that you will need to prepare a comprehensive business plan to show the lender what the money is needed for, exactly how you arrived at the amount needed, and how you'll be able to repay the loan without any difficulty.

There is no real worldwide norm of how a business plan should be presented, but financiers seem to have one common view: it should have a businesslike appearance. A simple spiral binder with a plastic cover on the front and back will make it easy for the reader to move from section to section, and will ensure that the plan will survive frequent handling. Don't overdo it with stapled copies and leather-bound volumes - these are often viewed as extreme. A near letter quality (NLQ) printer will produce a nice type finish, which, together with wide margins and adequate spacing, will result in a presentable and easy-to-read document.

The business plan and other documents you present is often the first exposure any lending institution has to you and/ or your company. Quite often they read the business plan before even talking to you on the phone or having a meeting. So the first impression you make is by means of your business plan. Now, we all know that first impressions are by far the most lasting, and if you wish to get over the first hurdle your business plan must make a favourable impression. A poorly prepared business plan can be a reason for the lending institution declining the loan - sometimes without even taking the time to ask you for more information.

Purely for your edification below is some reasoning produced by a survey conducted amongst venture capital organisations in the United States. Although the approaches to these organisations was for venture capital and not for raising finance for a building, the basic concept is the same. The participants were asked: 

What is the worst mistake an entrepreneur can make when completing a business plan? 

The respondents to the survey mentioned the following as major mistakes:

The response that occurred most frequently (17%) was that entrepreneurs were not clear in explaining the opportunity; i.e. why the business made sense and why it would make a good investment. Some respondents said that this was because the plan was incomplete, but others said it was because the plan had too much detail and was not concise or focused enough. This lack of clarity kept the venture capital firm from being excited enough about the company to proceed to the next stage. The plan was the first chance to sell the investor on the transaction, by telling the company's story in a clear and concise fashion. 

So, one should note that the first impression is extremely important.

Another critical error was one that is very difficult for entrepreneurs to avoid: that is making unrealistic projections (13% of respondents). A significant number of respondents (8%) said they see simplistic assumptions in the business plans they read, and the plans were filled with mistakes and errors. One respondent complained about the tendency of entrepreneurs to claim their projections are conservative, when this was simply not true. In the many years this venture capital firm had been in business, they have had many projected winners in their investment portfolio, but never once had a company achieved the projections of their original business plan. One respondent expressed this as entrepreneurs believing whatever they write as factual. One must of course then wonder: 

'Would YOU invest YOUR MONEY where people just don’t seem to know what they're doing, or for that matter care about what they're doing?'

The analysis of competition in business plans is an area where the venture capitalists believe entrepreneurs are weak (10%). Many do not make the effort, or find it too difficult, to gather data in a systematic way about competitors. Two critical mistakes, according to the respondents where:

  • Entrepreneurs say there is no competition, or 

  • Underestimate the strength of competitors, and consequently:

  • The plan does not describe any competitive advantage the company may have, or 

  • How to achieve a competitive advantage (failure to describe a sustainable competitive advantage was noted by 8% of respondents).

The question to ask oneself is then: 'Would YOU back a business that doesn’t bother to go into this aspect?'

Mistakes and errors appear frequently in the plans they see, according to more than 10% of the respondents, who also said that entrepreneurs sometimes try to mislead them with the information in the plan, or do not trust the venture capitalists sufficiently to give them key pieces of sensitive information in the plan.

Would YOU put your money where you can’t TRUST THE PEOPLE?

Quality of management was viewed as the most important factor in an investment decision, and another response that occurred regularly was that management strengths were overstated in the plan (8%) with one respondent even saying that entrepreneurs lie about their credentials. This is a critical mistake because the venture capitalist always thoroughly checks out the background of people involved in a company they are contemplating investing in. 

Incompleteness, including leaving sections out of the plan or not including sufficient financial data, was cited by 8%.

What do YOU think?

Other responses that came back were:

  • The plan does not demonstrate an ability to reach the customers and sell the product

  • Entrepreneurs simply do not understand their own plan

  • The plan has too much detail, and is not concise enough.

One interesting response was that the entrepreneur failed to provide the name of anyone in the company to contact after finishing reading the plan! 

When you deal with us we can supply you with a brilliant and comprehensive outline of a business plan and help review your plan before you submit it to lenders. 


Here are some more hints on preparing a Business Plan for raising funds

Business Plans written with the primary purpose of presenting the company to outsiders differ in format and presentation from a business plan developed as a management tool. While it is most beneficial for a company and management to go through the efforts necessary to establish goals, objectives, strategies and action plans, outsiders unfamiliar with not only the company, but also possibly the industry and products require a different presentation.

Below is an example of how a business plan for presentation to potential investors or lenders should be set-out:

EXECUTIVE SUMMARY

HISTORICAL PERSPECTIVE

ECONOMIC AND INDUSTRY ENVIRONMENT

PROFILE OF THE BUSINESS

Product

Market

Competition

Marketing

Management, Operations, Production, and Facilities

Current Ownership

Strengths, Weaknesses, Risks, and Opportunities

STRUCTURE OF THE TRANSACTION

FINANCIAL SECTION

APPENDIX

We'll very briefly cover each of the above headings:

EXECUTIVE SUMMARY

Like the business plan is your first chance to sell the investor on the transaction (by telling the company's story in a clear and concise fashion); just so, the executive summary is your first chance of getting the reader involved. The sole purpose of the executive summary is to entice the reader to review or request to review the entire business plan. It should therefore be viewed exactly like you would any marketing.

The executive summary is not a mini version of the entire business plan; it must be kept brief. It should be a two to three page overview of the company with one or two paragraphs under each of the headings given below. While the executive summary is presented first, it is written after the entire plan has been completed. It should not contain any information that cannot be found elsewhere in the business plan.

Capital Required: Amount, uses and type of the capital requested.

Business Activity: The company's products or services.

Business Profile: A very brief description of when the company was established, by whom, the number of employees, and any recent changes.

Market Opportunity: Define the company's market base, the customers, where they are located. Does any one customer provide the majority of sales? Number of customers.

Marketing Strategy: The company's marketing: advertising, promotions, methods of distribution, and sales force.

Competitive Factors: The competitors, their strengths and weaknesses.

Facilities: Buildings, locations, equipment, machinery.

Staffing: Number of employees and divisions.

Management Team: Brief description of Senior Management.

Ownership: Who are the owners and their percentage and relationship.

Financial Summary: Brief summary of the financial performance of the company for the last three to five years and what is projected for the next three to five years.

HISTORICAL PERSPECTIVE

General Overview

A brief summary of your firm which includes a description of the business, how it started, where it is now, major problems or accomplishments, products offered and who the customers are.

Financial Performance Review

This includes a five year trend of revenue and profitability. A comparison of the performance to industry standards and discussion of major asset acquisitions, and substantial changes in inventory, receivables, payables or debt.

ECONOMIC AND INDUSTRY ENVIRONMENT

Economic Environment: An overview of the major economic forces and how they affect your firm, its products and its customers. Also included is a forecast of the relevant economic factors. The purpose of gathering information about your industry and the national or local economy is so that you may develop reasonable ballpark projections for the short and long range. The objective of the economic analysis is to find economic variables that relate to your business. Forecasts of these economic variables can then serve as the basis for forecasting revenues or income for your company.

How will the performance of the national or local economy affect the operating results of your business in the upcoming year? What economic variables, such as inflation, consumer spending, Gross National Product, etc. affect your business and your customers? What's the outlook for these variables? If the economy's performance differs from your expectations, either positively or negatively, what would be the impact of your company?

Can any regression analysis be done between economic variables and the performance of your company? How confident are you of your economic forecasts? Economic forecasting is extremely difficult, and each year the "experts" disagree widely about what they expect the economy to do. The key thing to remember is that no one really knows for certain how good, or how bad, the economic situation will be in the future. You need to be aware of economic trends, but you shouldn't depend on any one forecast coming true.

General Economic Information
Stock Brokerage Firms
Major Accounting Firms
Reserve Bank Publications
Reputable Business Magazines

Regional Economic Information
Banking organizations
Marketing and Consulting Firms
University Departments
State Office of Planning and Development

Local Economic Information
Business and Professional Associations
City Office of Planning and Development
Chamber of Commerce
Local business Oriented newspapers

Industry Environment

A summary of your industry's performance and outlook. The outlook for your industry is just as important as the economic outlook. Compare your company's performance with that of the industry as a whole. Is your business doing better or worse?

Industry Information
Local and national industry organizations and associations
Industry publications
Trade Journals
Consulting Firms that specialize in your industry
Databases and research companies.

PROFILE OF THE BUSINESS

Looking at the past performance of the economy and how your business reacted is a start on reviewing the overall past performance of your company and its competition. Reviewing the past five years and what's happened, starts the process of focusing on the current year. Deciding what factors are important enough to be included, helps show you what factors need to be considered for the future.

Here are some questions you might consider: 

  • What is the operating history of your company? 

  • How has it evolved in terms of products, markets served, facilities management, organization? 

  • How has the general business or industry environment affected the company in the past? 

  • What have been the toughest challenges of your company thus far? 

  • What have been the greatest accomplishments of your business? 

  • Are any of these very different from the problems/accomplishments of your competition?

What Business Are You In?

Defining the business you will be in, over the course of the business plan period, is a critical function of the business plan. Keep in mind:

What value could my company provide to its customers? Or, what customers needs could be satisfied?

AND

How can my company productively and profitably serve these needs?

The essence of defining your business is finding a match between the answers to those two questions. Make a list of the potential needs of the customers that your company could serve. Then select the ones that are potentially the most profitable for your company. Then narrow the list further by selecting those needs your company has a strong ability to serve.

The Product

It will be necessary to define the product or service offered by the company. If the product has changed or is projected to change significantly, an explanation should be included. A comparison of the company's product with the competition's and the product's advantages and disadvantages is helpful. Any proprietary characteristics, patents, trademarks, or technological advances should also be included.

The Market

Who are your customers? In addition to discussing the market as it has been historically and is now currently, the market should be projected for the future and these projections supported by research, documentation or experience. DO NOT just say the market is at R10 billion annually, all the company needs is to get a 1% market share without complete substantiation. If different products have different markets, each distinct market should be addressed. The objective is to demonstrate that the market is large enough to support substantial sales growth or that the market is not currently being satisfactorily served by competitors.

Competitive Environment

An overview of who the competition is. Every product or company has competitors. DO NOT state that your company or product has no competitors. Even if your product is groundbreaking, there is always competition for the money spent by your customers with your competitors. How has your company compared to the competition? What is the outlook for any changes? What are the competitive advantages your company has, the resources and strengths that allow your firm to better serve those markets? What does your company have that the competitors don't have?

Marketing

A discussion of the past and current methods of marketing including: sales efforts; distribution; promotional and advertising programs. What marketing strategies will be implemented in the future and how will the effect of those strategies be measured? How will you know they worked? What will be the marketing expenses for these strategies? The objective is to demonstrate that the company has employed successful marketing methods and will continue to do so.

Management, Operations, Production, and Facilities

A brief resume of each senior member of management and their function and areas of responsibility within the company should be completed in addition to an organization chart and a brief description of the company's staffing and labour as it is now and as anticipated in the future. Any changes in operations, reorganizations or efficiencies should be described and projected benefits explained.

A general overview of the production process of the company helps an outsider understand how the product or service is produced. Any licensing, laws or regulations should be mentioned and explained. The facilities, including headquarters, offsite locations, branch offices and manufacturing plants should be described in general terms.

Current Ownership

The structure of current and projected ownership should be explained, including a summary of major stockholders, percentage ownership, and functions, if any, of these owners within the company.

Strengths, Weaknesses, Risks and Opportunities

Every company has risks and weaknesses. It's better that these topics are covered and addressed in the business plan than to leave it blank and have the potential investor bring them up. Just acknowledging their existence can offset some of the weaknesses.

STRUCTURE OF THE INVESTMENT

If the plan is being prepared for presentation to potential investors, a summary of the amount and uses of the capital desired is necessary. The structure of the investment and rate of return under different scenarios and structures can be presented. While it is important to have a structure offered, flexibility is important. An exit scenario (or how does the investor/lender get their money back) should be prepared as well. You must STAY FLEXIBLE here. Different institutions have different ways of looking at things, and you don't want to be dogmatic about this. Rather have them give you their requirements. Of course, the ideal situation would be to find out beforehand exactly how they like working - and then presenting it. This would require preparing a different section to your plan for each institution approached, but could be well worth the trouble.

FINANCIAL SECTION

Historical Review

A more detailed discussion of the financial performance of the company over the last three to five years and the reasons behind that performance. The balance sheet and cash flow should be discussed, as well as revenues, expenses and income.

The actual financial statements themselves can be presented in summary level. If audited statements are available, provide them in the appendix or state they are available in the discussion.

Projected Performance

Overview
A condensed concise summary that describes what is going to happen during the next three to five years and why.

Revenue Assumptions
A bullet point explanation of the factors that drive sales by product or market segment.

Cost Assumptions
A bullet point explanation of the factors which affect costs including changes in sales.

Capital Requirements
Each asset acquisition is described.

Profit And Loss Statements Summary;
but specific detail should be available in the appendix section.

Balance Sheet and Cash Flow
YES you have to have a balance sheet, it's not a complete financial forecast if only the profit and loss statement is included. Assumptions Bullet point explanation of relevant assumptions for receivables, sales, average days outstanding, inventory levels, debt levels, assets, reserves and amortization schedules.

Cash Flow Forecast Summary level
with a brief description of how excess cash will be invested and how a deficit will be funded.

APPENDIX

All information that adds creditability to your business plan. Copies of competitors' promotional materials, your company's promotional materials, specific detail for new product developments, surveys, maps, industry publications and support for your projections.


Here are some hints on Mortgage Bonds

The traditional mortgage is of the repayment type, where the capital and interest are repaid by regular, fixed payments (but are usually subject to changes in interest rates) over a period of, for example, 20 or 25 years. During the early years of the mortgage, the capital amount owed on the mortgage decreases relatively slowly as the bulk of the monthly payment consists of interest. The closer to the end of the mortgage period, the greater the reduction of the capital amount being repaid.

Mortgage loans may be at a fixed or a variable interest rate. With fixed rate mortgages the interest rate remains constant through the life of the mortgage term. Consequently you know what your payment will be for the life of the loan and you can budget more easily, without any fear or anxiety of your mortgage payment suddenly becoming unaffordable. On the downside is the fact that you'll be paying more as the initial interest rate is higher than that of variable mortgages.

Variable rates make mortgagers vulnerable to fluctuations in interest rates as even small changes in the mortgage rate can have a big effect on the outgoings of those with large mortgages. Variable Interest Rate Mortgages normally have an initial interest rate lower than fixed rates but will adjust upward (unless rates really fall). They may be a very good choice if you are sure that you will not be owning the property for an extended period (more than 5-7 years) of time.

Terms: 15, 20 or 30 years
You should go for the shortest term possible. The interest savings are enormous as the term decreases. Always make a comparison between a 15 year term payment and a 30 year term payment. The difference is often surprisingly smaller than anticipated. The savings over the term of the loan, however, can be substantial. For example, comparing a 15 year term to a 30 year term, R100,000 mortgage at an 8 1/2% fixed rate yields the following results:

Principal and Interest Payment (per month)
15 Year: R985
30 Year: R769

Total paid over term in capital and interest
15 Year: R177,300
30 Year: R276,840

Total interest over term
15 Year: R77,300
30 Year: R176,840

HINT: If you just can't qualify or afford a shorter term try to add at least the amount of 1 additional payment per year--this will knock nearly 10 years off a 30 year loan.

If you wish to work out some bond repayment figures you can do so on our calculator page. To go to the calculator simply click on Loan Calculator link under the flag at the top of the page.

 

 

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If you do your business plan along the above lines you should not have to much difficulty raising the required finance. When you deal with us we will help review your plan before you submit it to lenders. 

Our expert advice is only a phone call, fax or e-mail away -

Tel: (011) 453 4401           Cell: 084 303 8179            Fax: 086 640 4667

E-mail: info@building-sa.co.za

 

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