How do I get going when the bank won’t lend me money?

Hi Aunty B,

You might be the Business Bitch but I need to have a bitch just to get this off my chest. I run a growing and profitable business, even making money during the GFC. I want to buy out another similar company that’s also doing well, but the only loans I can get need to be fully secured against “bricks and mortar”.

Now, anything secured against bricks and mortar is, by definition, a mortgage and not a loan. Here is the definition of a mortgage: “a conveyance of an interest in property as security for the repayment of money borrowed.” Where as a loan is “the act of lending”.

If no bank will lend money then there is no such thing as a business loan and they shouldn’t be advertised as such. They should be called a business mortgage loan or a business overdraft mortgage.

If I want to extend my mortgage, I’ll go to my local credit union and pay 5% interest rather than pay a bank 9% for a mortgage that they’ve incorrectly renamed as an overdraft, business loan, etc. purely to screw me for more fees and higher interest.

Am I missing something here?

Jim

Hi Jim,

I am off seeing my bank manager today, so I’ve enlisted the help of a very special guest in Reuben Buchanan, the founder of Wholesale Investor and Wealth Creator magazine and a corporate advisor with Integral Capital Group. Here’s his answer:

This is a common question that I come across almost weekly as I speak at many business seminars and entrepreneurial events. Firstly, you’ll be happy to know that most entrepreneurs start out this way. You only have to read the BRW Rich List to learn that over two thirds of them started with zero. So yes it is possible.

As someone who has started half a dozen or so companies from scratch, I can tell you firsthand that it is not easy. However, here is my advice on what you can do.

From your email I don’t know much about your venture so it’s hard for me to be specific – so my advice here is generic.

Step 1 – Get Cashflow

You cannot sustain your life (and sanity) without cashflow. So step one is to shelve your business idea until you get a job of some kind. I know this is not what you want to hear, but if you don’t, you’ll soon be in a world of pain (if you aren’t already).
And no investor or bank wants to back someone who is totally desperate and on their knees. They will definitely be thinking: “wow, if I give him my money he will probably lose that too!”

So focus all your time and energy on fixing the cashflow problem. Sort out your transport situation with your wife and don’t do anything else until you get a job. It’s not impossible and there are plenty of opportunities out there at the moment. I think the reason you have found it hard to get a job recently is because you have been tinkering around with your business idea.

If you can’t get a look in, then offer an employer to work for free for a few weeks to prove yourself. What have you got to lose because you are making no money anyway? I recently hired someone because she offered to work for free for two weeks to prove herself. She is very motivated and works hard so after two weeks I started paying her because I like her attitude and she adds value to my business.

You can’t move ahead until you do step 1. You can do it if you focus.

Step 2 – Get a mentor

Your next step is to find a business mentor who has raised capital and built a business from pure start-up stage. At this point you should not have taken your “venture” off the shelf yet. Don’t touch it until you have a mentor. This person will show you how to do it because they have done it before. What you are doing is trying to reinvent the wheel by going it alone.

What does a mentor cost? Nothing. I have had over 20 mentors in my life – many of them multi-millionaires – and I have never paid them anything. They are usually willing to help budding entrepreneurs who demonstrate passion, drive and enthusiasm. You will only need them for a few hours a month and in return you can either give them some equity in your venture, a percentage of revenue, mow their lawns, wash their car – do whatever it takes to tap into their proven knowledge base.
If they have raised capital before, they will also assist with structuring your offer, how to find and approach investors, etc. They might even know an investor or better still – invest themselves!

Step 3 – Put together a proper Information Memorandum

Now you have cashflow, a mentor and a business idea. Now you are getting somewhere. What you have to do next is forget about banks for about five years. They will not give you money for a start-up. Even if your business was established and profitable, it would be hard to get money from them without property assets, director’s guarantees, firstborn child, etc.

Your only potential funding source is private investors or Angel Investors. These are individuals who are interested in backing early stage ventures in return for an equity stake in the company.

Your mentor will show you how to write what is called an Information Memorandum.

Its a 20-odd page document that describes your business opportunity, the market place, projected earnings, who’s behind it, risks, returns, how much money you want, exit strategy, etc, etc. If you want to see some examples of completed Information Memorandums, go to www.wholesaleinvestor.com.au and have a look as some of the ones that are listed there.

In your Information Memorandum, make sure you add that your mentor is on your advisory board (clear it with them first of course!).

Step 4 – Seek an Angel Investor or business partner

Now you are ready to seek either an investor – who invests in return for an equity stake. Now because you are a start-up, the investor will end up with a fair chunk of the company. This is okay because without their money, your business is worth nothing anyway. So be ready to part with 20% to 50%, depending on how much money you want, what they want, the strength of the idea, etc.

Alternatively, you could seek out a business partner who owns 50% of the business, and contributes the capital. You own the other 50% and run and drive the business.

Step 5 – Build the Business

All this is going on while you still have your job. So what this means is that you will probably be working more than 40 hours a week. That’s okay because it’s just until you can leave your job and work in the business full time. So the next step is to focus on building cashflow within the business so that you can work in it full-time.

Once again you will be drawing on your mentor for advice here. Assuming you have the right mentor, they will advise you on what to focus on and how to get the cash coming in the door. A common rookie error for budding entrepreneurs is to chase down the exciting stuff – like international expansion or new product development.

However, this is a mistake. In the early stages, you need to focus all your energy and attention to cashflow. Once things are looking good, you can then start to think about expansion, product lines, new distribution channels, extra staff and so on. But at every step of the way, get advice from your mentor. Remember, they have done it before so they will guide you along the right path.

Once the business can replace you employment income, you can then leave your job and focus on the business 100%.

Some extra tips for you Jim:

Be patient: too many budding entrepreneurs get excited about their idea and they want to do everything yesterday. Don’t fall into this trap, there is plenty of time. And if the opportunity passes, I can assure you there will be another one just around the corner.
Don’t be greedy: I see a lot of entrepreneurs fail to secure funding (sometimes for years) because they want to value their idea at millions of dollars. The investors won’t go for this. In the current market they want value for money. So tying to raise $1 million for only 5% or 10% of your idea – no matter how great it is – will result in failure. Remember, it’s better to own 50% of a successful business than 100% of nothing.
Don’t be precious: What I mean by this is, don’t get all hung up on this idea. It may not even be a good one! Few successful entrepreneurs make their fortune out of their first venture. It’s usually their third or even their 10th venture before they achieve success. So don’t hang your hat on this idea working. Just think of it as step one of a business journey that will ultimate lead to your success – so stick at it!

Reuben Buchanan has 15 years experience in finance, investment, publishing and media. In 2001 he launched Wealth Creator Magazine, which today is one of Australia’s leading investment publications. Reuben developed the Wealth Creator brand into a successful media company encompassing TV, radio and events, which he later sold. Today, Reuben is involved in several other ventures including corporate advisor of Integral Capital Group, director and cofounder of Think Big magazine,director and cofounder of Wholesale Investor and owner of Teldar Media, which specialises in entrepreneurial business education.