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We can't get a loan to grow


Q. Our business has been established and thriving for a decade and while our previous expansions have been funded by profits, our latest development will need external funding as any further internal funding could restrict our cash flow. The loan needed would be substantial and I was advised that without a premise to mortgage against, an in-depth business plan would get me funding with the majors or angel investors. Now that a full plan has been created, it's still near impossible to find a loan that isn't against a property/premises whereas there is plenty of trading stock to secure the loan against. Am I just not looking to the right groups/entities for funding?

A. Managing working capital is a key, and often quite challenging, role for most business owners.  When the need for new capital in a business exceeds what is available from re-invested profits then there are a quite limited range of options available.

Obviously one option that is available is to slow the rate of growth of the business down until the need for new capital matches the funds available. Whilst this means a reduced rate of roll-out for new programs it may often provide the best way forward. When Bill Hewlett and Dave Packard started their company in that now famous Palo Alto garage, they made a decision at the outset to never borrow money to fund their company’s growth because they had seen banks foreclosing on many very solid businesses in the past. This strategy did not stop their company eventually growing to be one of the larger corporations in the world.

Your comments about the lending attitudes and practices of banks matches with my experience: they will not make unsecured loans to smaller businesses. The security they require is invariably bricks and mortar and it does not surprise me that they would be very unlikely to lend against your trading stock. While they require detailed business plans to be submitted with loan applications they are not prepared to be exposed to business risk.

You mention business angels and generally these are only prepared to make smaller equity investments in businesses. They also typically require board representation and a say in key business decision making. So angel investors may not be able to provide the larger amounts of funding you are seeking.

Venture capital could be another possible source of funding, however typically venture capitalists are looking for businesses in particular technology areas that provide potentially rapid rates of growth and high rates of return on equity. They will be looking to take large equity stakes in your business and may even want control.

They will expect to identify and fill skills gaps and have a say in decision making. You will therefore need to yield significant control of your business in return for the capital you are seeking. You will also need to offer them an exit scenario that may not accord with your own vision for your business.

Another possibility you might not have yet considered is a merger or alliance with another company in your industry. Once again you will typically need to yield significant control of your operations in order to make this work.

So in summary, if you can see a viable way forward that does not require outside capital, this will be the way that will be less stressful on you and will allow you to maintain control of your business. If this is not possible then your options are either to not proceed with the new development or else to be prepared to commit further personal assets to the business or to give up equity in your business to a new investor.

Good luck with your business development.

Guy Ward, business mentor, SBMS

4 comments so far

  • We started a small business July last year. We couldnt even borrow $5k. The thing that I find remarkable is the banks advertise themselves as supporters of small businesses yet it so difficult to get anything from them. Anyway we turned over $900k in our first year and made a very good profit with no debt. Just like HP

    Date and time
    October 11, 2012, 12:50PM
    • SR from Manly, would you like to share what did you end up doing then? Creditness is directly related to ability repay through income or your assets, is not it? There will be high risk unsecured credit card debt, but it comes at a cost, which is difficult to still make money out of that investment.

      Back to original person who asked the question, will it also depends on the actual $ versus how is your business valued or have average net profit over last 3 yrs? It must have been covered in your business plan.

      The bottom line here, is, bank sees this way, if you do not want to risk your personal assets (such as your home, if you have one paid off), why would they risk money they managing on behalf of shareholders?

      Date and time
      October 17, 2012, 12:18PM
  • You might also want to consider a staff buy in or some form of employee share plan.

    Another option, considering you have significant stock is to factor the stock through another a non-bank agency. This may not get you the full amount but perhaps the next development can be done in stages?

    Mike Williams
    Date and time
    October 12, 2012, 3:26PM
    • Small businesses could consider invoice finance (factoring) as a means to fund growth. This involves selling your invoices to instantly inject cash into the business. This can usually be achieved without have to provide bricks and mortar security.

      Date and time
      October 15, 2012, 12:58PM

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