If you’re a small business owner you may have heard this one before. You may have even said it once or twice!

A few weeks ago we workshopped a case with National Bank where the business owner was looking for a loan to ‘tidy up a few bills’ and to fund a little expansion plan she had in mind but the bank weren’t so keen. It was hard to understand because the business was able to show a nice upward trend in sales and profitability over the last few years. That’s a pretty good story against the backdrop of an economic recession.

But digging a little deeper into the financial accounts highlighted some issues which made the bank less enthusiastic

  • stock levels had doubled and so had the length of time it took to sell her goods
  • the time taken to pay her suppliers had doubled and it was taking longer for her to collect invoices she was owed as well
  • Solvency was getting worse

From a bank’s perspective a worthy borrower is not only profitable but also has sufficient cash flow to pay its bills on time (one of which and usually the biggest will be a mortgage to the bank). In this example the bank can see plenty of profit but poor cash flow and throwing money into expansion and to pay suppliers wouldn’t really do anything to solve that problem. In fact by increasing expenses it could make the problem even worse! Why would a bank support that?

In this case the bank did actually come to the party. But how?

Basically the owners initial proposal had missed the mark by talking about how the business would generate increased profit and how wonderful that would be. But it failed to talk about the cash flow problem and how that was going to be addressed.

The new proposal included using a daily deal site to move the excess stock and get some cash in the door. A system was set up to give a discount against future purchases for customers who paid within a short timeframe. A payment plan was worked out with the two large customers who were taking longer to pay. And in conjunction with the accountant some realistic numbers to support the plan were put together. It worked.

Lessons learned?

Keep an eye on your accounts and get a good book keeping system like Xero so you can punch out regular reports and monitor this stuff.

A bank is a bill and like you, it wants to be paid on time. Remember profit is nice but cash pays bills.

Banks do actually understand business pretty well and do support self-employed people.  But they have very little time for owners who don’t understand their own business.

Resist the DIY approach to lending and get a broker to help you. A good broker will address any issues and tailor your application to suit.

About Campbell Hastie

Cam is one half of Auckland based mortgage brokers, The Go 2 Guys.

He makes a living by sharing what he knows about mortgages with people, arranging mortgages for people and then insuring people.

He doesn't claim to know everything about mortgages himself which is why he teamed up with David Mercer — hence the ‘2’ in Go 2 Guys.

He writes posts regularly on his blog and has been told he has an ability to share his knowledge in a simple and sometimes memorable way.

Feel free to comment and ask any questions. Contact Campbell Hastie m: 027 697 7789.

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