Start-up business owners should forget trying to get a bank loan unless they have housing equity to fall back on and those who have been in business a few years will need to have clean financials if they want to borrow.
That's the advice from Gordon Stuart, a former ANZ head of agri-banking who has set up a new business called Chaperon alongside former ANZ chief economist Cameron Bagrie to help small businesses secure loans from banks.
Small to medium-sized business owners have long complained about how tough it is to borrow from the banks and it has only got tougher in the last year with the pall of uncertainty cast by Covid-19 and Government-stipulated lockdowns.
Stuart, whose background includes working with big corporates on merger and acquisition deals, said small business owners tended to wear many hats.
"One is a director and one as an owner - but often the one you have on the most is the firefighter's hat.
"You just don't have the time to do all these things well. Outsourcing things to people is key."
Stuart said part of the reason small businesses had a tougher ride when it came to getting a bank loan was the complexity involved in business lending.
"it is much easier to do a residential mortgage ... if you look at the skills that it takes, it is basically formula-based. So you get an LVR [loan to value ratio] and have a multiple of a salary.
"Business lending is much more complicated than that. And so it just takes more skill and time."
Stuart said Covid had complicated business lending further by making it difficult for businesses to forecast revenue with any certainty.
"It has made the cashflow forecasting very difficult and because of the responsible lending code banks now have to comply with, they have to be satisfied you can repay the loan and when you can't forecast any certainty with Covid that has made it very very difficult.
"I've got customers that are way up and way down and others have had their best year ever and thought they were going to be bankrupt in March last year. That has just added complexity."
Stuart said small or start-up business owners typically had to put their house up as security to get a loan as banks wanted to see two or three years' worth of financials before they would even consider lending to a business.
"It is really difficult at the small end. Risk is higher with small businesses. That is why the first thing they do is put a general security agreement over the business and they look for house support. That tends to be what happens at the small end of town."
"Banks are massive volume businesses. But they lend at small margins so they can't afford to lose money. They always like to have two or three ways out - first is cashflow, second one is recourse to security or ability to sell some assets."
What can SMEs do better?
Stuart said those wanting to get a loan needed to have all their ducks in a row.
"Your financials have to be clean. So if your balance sheet is wrong, so is your profit and loss."
Stuart said a lot of owners did not understand their balance sheets.
"The banks, one of the first things they are going to do is look at your debtors. If they are all 90 days plus they are not going to lend to you.
"What is the age of your stock? Are your liabilities up to date? Are your taxes up to date?"
Stuart said if all of those were clean, then a businesses was off to a good starting point.
He said it was normal practice for banks to want to see two to three years' worth of financial data before they would lend any money to a business.
"They like to look at what you have done historically. Have you achieved what you said you were going to achieve? That then comes down to how good is your management."
Have a plan
Stuart said another key was to have a clear, simple business plan.
"What banks like to see is a consolidated forecast of both your cashflow, balance sheet and your profit and loss. And also you need to be able to explain your personal financial situation."
He said when communicating across a bank, if it was not simple the message could get misunderstood by the time it got to the person signing off the credit.
Stuart said it was tough for some at the moment as banks did not like certain industries.
"If you take tourism now, your chance of getting a bank loan in tourism is going to be pretty low. There is no rocket science behind that."
But he said some industries were just more risky than others - like construction and sometimes the transport industry.
"That is why you have to be able to explain the key risks in your business and then how you mitigate them. That shows you understand them and have got a plan in place."
Stuart said it was important to communicate early and regularly with banks.
"Banks hate a vacuum. You should be updating them regularly with monthly results."
Build a relationship
Stuart said building a relationship with a bank was vital for helping to gain trust.
"People will make a better effort for you than if you haven't done anything. It's a bit like going to the doctor regularly."
He admitted it was hard for small businesses to do this particularly when some bank managers were looking after 300 business customers at any one time.
"It is pretty hard to see 300 people in one year. That is one of the issues we have got."
He said banking was a risk-management issue as well and as businesses grew it paid for them to have two or three banks they worked with.
"Don't have all your eggs in one basket."
Stuart said he often helped businesses to refinance to different banks because they were unreasonable or didn't understand the business.
Finding a good banker was also key. "If you can find a good one, follow them."