Private Finance Application
Getting Ready for Finance Checklist
The Department of Trade and Economic Development has put together a checklist to help you in the preparation of a finance application to a bank or finance company. It is designed to guide you through the process of obtaining the most effective finance for your business. The checklist will help you to gain an understanding of the sorts of questions that a lender is likely to ask about your application, as well as the sort of information that is required to put together a professional (and successful) presentation.
The SA Department of Trade and Economic Development also has a range of programs and initiatives to assist small and medium enterprises to grow and expand. (link to Doing Bus in SA)
What type of finance do I need?
The first place to start is to determine what type of finance is required. There are three main categories of finance:
• Property finance - for acquisition of a property or to re-finance an existing property loan.
• Working capital finance - to finance stock, debtors and overheads in a business.
• Plant and equipment finance - for new or used plant and equipment, motor vehicles, furniture and fittings.
What type of facilities are available?
Once you have determined the type of finance, it is then important to select the right product to match. Generally speaking, short-term finance should be used for short-term assets, such as stock or debtors, and long-term finance should be used for long-term assets, such as property. Following is an overview of the most common types of finance facilities.
Short term
• Overdraft facility - a credit limit on a cheque account that provides the business with short-term funds for working capital. This is considered a short-term facility as the bank can withdraw the facility by giving the business notice (generally a month).
• Short term commercial bills - a form of commercial loan that can be structured on an interest only basis, or reducing basis, for short-term debt.
• Bridging finance - a loan facility that allows a new property purchase before the existing property is sold.
• Letter of credit - a short term finance facility for import and export business usually negotiated in foreign currency.
Long term
• Commercial loan - loans for most commercial purposes such as property, working capital or plant and equipment.
• Long-term commercial bills - a form of commercial loan that can be structured on an interest only basis, or reducing basis for long-term debt.
• Commercial property loan - a commercial loan that is specifically written for property. This is normally a medium to long-term loan.
• Fully drawn advance - a loan facility that reduces on a principal and interest basis over a fixed term.
• Development loan - loans tailored for developments that can be drawn down in progress payments as required up to an agreed total.
• Hire purchase - a loan facility for plant and equipment that has a fixed term with fixed monthly principal and interest repayments and also may have a final lump sum instalment or "balloon" payment.
• Debt factoring - a working capital facility with a limit based on a percentage of the debtor payments due to the business.
• Home equity loan - a loan that is secured by the equity in a borrower's home.
• Leasing - a finance contract based on monthly rental payments in advance or arrears over fixed term with a "residual" payment due at the end. Normally used for plant and equipment.
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What are the major sources of finance?
The first place to start is to determine what type of finance is required. There are three main categories of finance:
• Major trading banks - all of the facilities are available from the major banks such as National Australia Bank, Commonwealth Bank of Australia, ANZ and Westpac, and many are available from South Australian banks such as Bank SA and Adelaide Bank.
• Finance companies - offer a good range of commercial plant and equipment products and working capital facilities.
• Accountants - your accountant may be able to arrange business finance on your behalf.
• Finance brokers - a finance broker will arrange finance on your behalf on a commission basis.
• Merchant Banks - mostly for large transactions.
• Friendly Societies - have a limited range of commercial products, but are competitive for personal lending.
• Credit Unions - have a limited range of commercial products, but are competitive for personal lending.
• Building Societies - have a limited range of commercial products, but are competitive for personal lending.
How do I develop a loan proposal?
Purpose of the loan
A lender will want to know in detail what you require finance for, as well as the terms and facilities you require.
This includes:
• amount and term of loan required - how much you need and how long you need it for.
• what the funding is required for - who the money will be paid to at settlement and the breakdown of plant and equipment, working capital etc.
• repayment source - where the repayments come from; this may be from revenue from the business continuing at the current rate; perhaps from increased sales due to the purchase of additional capacity in the form of equipment, or it may be from reduced costs due to improved technologies within the business by the purchase of new equipment. It is important to detail exactly how the funds are being generated to pay for the loan.
• what security you are offering for the loan - the assets that are being offered to the lender as security for the loan.
The value of different types of assets
| Type of Asset |
Lending Valuation Ratio (LVR) |
| Stock |
20-30% |
| Debtors |
20-75% |
| Plant & Equipment |
20-100% |
| Property |
60-75% |
It is important to remember that the different lending valuation ratios are dependent on varying factors. For further information, refer to the section on "How much can I borrow?"
• Valuations of security - what the assets to be offered as security are worth, and the details of any independent valuation. Independent valuations can be important, but it should be remembered that they will cost the business money to obtain. In some cases the bank may request an independent valuation. Also detail whether there is an independent valuation of the security or not.
• Contract details - the details of any contract for the purchase of a property, business, or plant and equipment, with a copy provided in the application.
• Settlement date - what date do you have to pay the vendor, or supplier of goods.
• Facility type - what types of products or facilities are required. You may need more than one type of facility.
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Applicant details
Describe and explain your business; your history, your management skills and gaps, your financial details and track record, etc. Provide as much information as possible and be honest with the lender.
• Borrowing entity - details of the borrowers or the entity that is to be the borrower.
• Legal description of the entity - (i.e. ABN/ACN & ABC for a company, company structure etc).
• Guarantors - the names and details of the individuals that will provide personal guarantees for the loans.
• Owners and managers - the owners and managers names and details.
• Accountant and solicitor - contact details in case the bank requires further legal or financial information.
• Bankers - current bankers' details.
• Legal documents - e.g. copies of Partnership Agreement, Constitution of Company, or Trust Deed for a Trust.
Business and Industry Details
• Management - outline the management team and the structure and background of your business.
• Products and services - what are you offering to the market?
• History - the track record of the business and how you came to be where you are today.
• The market - outline the geographical location, size, growth levels, trends, and number of competitors in your market.
• Resources and location - where the business currently operates from, and what plant and equipment and other resources it uses.
• Competition - provide a profile of the competition, their capabilities, location, strengths and weaknesses and where your business fits in relation to them.
• Suppliers - the details of the key suppliers of resources to the business.
• Customers - outline briefly your key customers (details of their value to your business).
• Key staff - details of the key employees of the business and their roles within the business.
Financial Details
• Financial statements - include financial statements for your business for the last three years.
• Cash flow projections - Supply projections for at least the next twelve months, particularly in regard to the purchase of new equipment, which should increase revenue and/or reduce costs.
• Current borrowing's - detail the current facilities and terms of any borrowings against the business
• Personal assets and liabilities - a statement of assets and liabilities of all guarantors.
Security
• Real estate - if your business is providing real estate as security for the loan, outline the legal description and address of the property.
• Plant and equipment - if your business is providing plant and equipment as security for the loan, provide details of each item.
• Other assets - description of any other assets to be offered as security.
• Guarantees - Details of any guarantees to be offered.
How do I plan my presentation?
• Be prepared - follow this checklist to ensure that you have gathered all the relevant information that may be required.
• Understand the taxation consequences of the facilities required by your business - you may need to ask your accountant about the tax consequences of the facilities you have chosen. Often, there is a different tax treatment of one product versus another in terms of the timing of deductions, depreciation allowances or GST.
GST Checklist for Finance
GST checklist for finance
| Product |
GST Status |
Taxable Supply |
| Overdraft Facility |
Input taxed |
No |
| Commercial Loans |
Input taxed |
No |
| Commercial Bills |
Input taxed |
No |
| Commercial Property Loans |
Input taxed |
No |
| Fully Drawn Advance |
Input taxed |
No |
| Bridging Finance |
Input taxed |
No |
| Development Loans |
Input taxed |
No |
| Hire Purchase |
Principal is Taxable
Interest is Input taxed |
Yes
No
|
| Debt Factoring |
Input taxed |
No |
| Home Equity Loans |
Input taxed |
No
|
| Leasing |
Taxable |
Yes |
| Letters of Credit |
Input taxed |
No |
How much can I borrow?
This will depend on the quality of the assets being offered as security, but this table may help you to work out how much you can borrow:
Borrowing ratios
| Type of Asset |
Lending Valuation Ratio (LVR)
|
| Stock |
20-30% |
| Debtors |
20-75% |
| Plant & Equipment |
20-100% |
| Property |
60-75% |
Generally speaking, assets will score a higher LVR if the bank can easily identify and sell them in the case of default in repayments.
It is important to remember that the different lending valuation ratios are dependent on varying factors. Stock is dependent on how easy it is to sell, on what conditions the raw materials were sold to the business, the processing time from raw material to finished goods, and whether the stock may deteriorate quickly (an example is food related products). Debtors are dependent on their quality. If you deal with what are considered blue chip companies or Government, the lending valuation ratio will be higher than if you are dealing mainly with small companies.
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Will my proposal be successful?
It must have these essential elements:
1. Servicing ability - can I comfortably afford the principal and interest repayments on time every time?
2. Security - does the bank have sufficient security to recover its debt if I can't make the repayments?
3. Track record - have you been able to do what you said you could do in your dealings with banks in the past?
You can be reasonably confident of success if you have explained these elements in you proposal.
Equity Capital
Equity capital includes funds raised by issuing shares in the business. The rewards for holding shares come in the form of dividends and/or on final distribution from sale of assets of the company.
Dividends are not tax deductible to the company, which makes this form of fund-raising expensive. On the other hand, equity holders share in the risks - if there are no profits, they can't demand payment of dividends. In most cases, equity capital does not have to be repaid after a fixed term. Because of these factors, infusion of equity capital makes the business more secure, which in turn improves the chances of raising debt finance.
Debt - Equity mix:
Give careful consideration to the mix of debt and equity capital that your business/organisation is to have. Although debt finance is cheaper, obtaining such finance depends on your ability to repay. It may also require significant security. Also ensure that your business/organisation is not too leveraged (ie, the ratio of debt to equity is not too high).
Equity Capital Options
Providers of equity capital
| Capital stage |
Providers |
Amount |
| Seed |
R&D Grants |
<$100,000 |
| Start-up |
R&D Grants
Business Angels
Venture Capital |
$50,000 to $1m.
|
| Expansion |
R&D Grants
Business Angels
Venture Capital
Corporation Builders
Regional Development Fund
Equity Market via BSX (Bendigo Stock Exchange capital raising services)
ASX Regional Program (Australian Stock Exchange)
|
$50,000 to $20m. |
| Later stage expansion |
Venture Capital
Corporates |
$10m. to $50m. |
| Initial Public Offering (IPO) |
Equity Market via BSX (Bendigo Stock Exchange)
Equity Market via ASX (Australian Stock Exchange) |
>$5m.
|
| Infrastructure projects |
Private sector infrastructure funding
|
>$10m.
|
Business Advice is freely available from your local Regional Development Board.
Becoming "Investor Ready"
The Department of Trade and Economic Development offers this program as a preparation method to assist companies in obtaining equity capital.
The SA Department of Trade and Economic Development also has a range of programs and initiatives which assist small and medium enterprises to grow and expand.
Business Angels
Business Angels are private investors, generally with an interest in businesses in their early or start-up stages of development. They are prepared to risk capital in innovative ventures, and may offer both capital and management (or specialist expertise) to enhance the entrepreneurial opportunity.
A number of matching services have evolved, various methods of matching potential investments with willing investors.
Most business angels are looking at a three to five-year investment, with compound returns of above 30% (generally). The investor is looking at making a return on the sale of the shares at a later date, whether to another investor, you, a venture capitalist, trade sale or initial public offering.
Business Angels provide an investor particularly suitable for micro or small business opportunities. The potential combination of capital and business experience can be very attractive to a business in its early stages of growth.
How to make contact with Business Angels
Australian Business Angels facilitates the identification and introduction of investment-ready companies to business angels who are able to provide capital.
• SEPO Market (Australia) Ltd operates the Small Enterprise Public Offering (SEPO) Market, an internet-based, dynamic market place where equity in small to medium sized enterprises (SME's) can be sold or transferred. It is a facility that caters specifically to the needs of investors in SME's and SME's seeking equity capital. Companies use the SEPO Market to raise from $200,000 to $5,000,000 in investor capital.
Small Enterprise Public Offerings have proven to be successful for a wide variety of transactions and industry types: corporate seed capital, corporate expansion capital, real estate equity funding (acquisitions, development projects, golf courses, tourism), capitalisation for early to pre-IPO stage technology companies, expansion funding for retail companies, and product development and distribution funding to name but a few.
• Business Angels Pty Ltd is based in Victoria and utilises a process of matching via people's personalities.
• Business Angels Service is based in Victoria and are a non-profit network operating out of the Victorian Employers' Chamber of Commerce & Industry. They use a number of methods, including, an Internet listing service, targeted matching, and publications (e.g. "Angels Wanted" in BRW). Ph: 1800 671 689
• enterpriseangels.com is an initiative of Corporation Builders Pty Ltd, which has teamed up with the ASX Enterprise Market (e.m) to provide an interactive early stage capital market for companies seeking up to A$500,000. This also provides companies with a simple way to access investment and mentoring support to further develop their business.
• Bendigo Stock Exchange operates a range of capital raising services for those seeking equity investment, start-up assistance, business partners, joint ventures, strategic alliances, etc.
• Legal, stockbroking, and accounting firms all have high net worth individuals that are looking for investments.
Corporation Builders is a Queensland-based not-for-profit organisation that hosts seminars in South Australia, sponsored by the Department of Trade and Economic Development, and aimed at fast growing enterprises looking for equity above $1.5M.
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