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 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.