There’s a strange thing that happens in the Zimbabwean space. One of the biggest complaints you will find amongst small businesses is the lack of capital and funding in Zimbabwe. This is strange because according to the World Bank ease of doing business report, one of Zimbabwe’s areas where it performs best is access to credit. Scoring 65 out of 100 in the 2020 report. There’s clearly some sort of disconnect between businesses and lenders which is what we will try to bridge today. Investors are a whole different kettle of fish and a much more varied group so we will look at lenders and what they look at when considering your appeal for a loan.
Just to be clear on what exactly lending is, we are talking about sums advanced to a business that is to be repaid with an interest element and that require repayment of the principal amount extended to the business as well. Usually, these repayments are structured with a fixed amount paid over a defined period. The repayments are split between paying the cost of interest and repaying the principal, with interest being prioritised and the principal being the remainder of the instalment. So what exactly are lenders looking for in a business when you try to borrow?
First and foremost if you are trying to borrow for a business that is not yet operating you face an uphill task. Almost impossible. If you look at the paragraph on lending you will understand why this makes sense. Loan repayments are dependent on consistent and predictable cash flows. This is something that a business that has not yet started operating cannot guarantee with any degree of certainty. Lending to a business that is not yet operational may prove unwise if the business fails to take off or takes off but the projections do not match reality.
Say you have a business that is operational you will still need to prove that you have the free cash flows to meet the payments. There’s an old joke that says to get a loan application approved all you have to do is prove that you don’t need the money. This is pretty much how it works in business lending. What the lender would like to see is free cash flow that can comfortably cover the repayments.
Lenders are a very pessimistic bunch. They operate in a Murphy’s law sort of thinking; everything that can go wrong will go wrong. While we as businesses approach these institutions from a position of optimism they evaluate from a position of extreme pessimism. So when they ask for your financials or list of assets they are looking at the ultimate worst-case scenario. If you fail to meet your obligations and they must come after you, will they be able to recover their money based on the assets you have? It goes a bit deeper because it is commonplace to request 2:1 asset cover, in English they will lend you up to half of the value of your assets. And your feelings on the probability of failing to pay here don’t count.
Another thing that lenders will tend to look at is your track record with lending and repayment. All the figures in the world are great but you need a proven record of making payments on time. Here is the thing; a poor track record dooms you, no track record makes you questionable and a good track record is positive. For all the pessimistic posturing that lenders do there is still benefit to them in the lending process. They are not benevolent charities doing you a favour. The favour goes both ways. Your positive track record is a benefit to the lender. However, if you don’t have one it doesn’t automatically disqualify you.
In addition to funding operational businesses, you will also see that lenders prefer financing working capital loans. There are many reasons for this but we can condense them all into a lower risk to the lender. Another factor that can score positively for you with lenders is growth potential. Please get me right here, those projections you put together are not the growth potential I am speaking of here. Lenders will generally spend a lot of time, money or both assessing the prospects of certain business types. So whilst you may think your business has massive growth potential it is the growth potential they as lenders know to be true of the industry that matters, not your optimistic beliefs.
When approaching lenders you will do yourself a world of good if you look at things from their perspective rather than yours. You probably need the money and have good ideas for it but are you a safe destination for the money? Perhaps the harshest part of it all is that failure to meet one requirement can totally disqualify while meeting all the requirements is not a guarantee of approval.