If you just joined the series, click here to read the Introduction to the CAMPARI framework.

We are now coming to the main part of the assessment process – how much you want to borrow. In this section, the Manager will review the amount being requested and decide if it’s a request he feels comfortable with taking into consideration the size of the business, the information gleaned from the financial forecasts and what he has learned from your Business Plan and interview.

Is a Cash Injection Being Made?

We have already mentioned that the Bank likes to see the owner investing or risking some of his money in the venture. Investing in a business is not a one-way street. The Bank wants to see that the owner is tied into the business by having committed some of his own resources, often referred to as a stake.

As a rule of thumb, the Bank looks at a minimum injection of 25% to 30% of the project cost. For example, if a loan is requested to assist in buying a new business premises for N150,000, then the Bank will be looking to the owner to inject N37,500 to N45,000. A good stake in any project will go a long way to improving the chances of success and will be seen as a strength.

Where the cash injection is coming from will also be a factor. If the owner is borrowing it from another Bank or Finance company then this will be considered a weakness (that’s assuming you have told him of course!). The reason behind this is that the loan will be yet another finance cost to service and may put an additional strain on the business.

However, outside borrowing is not always regarded as a black mark. If the owner has raised another mortgage on his private property to form part of his stake, then this is a demonstration of his commitment to the business, i.e. he is prepared to risk his house to help the business succeed. Another example could be a family loan. Loans from parents or other family members for example, are not uncommon and this usually provides an extra incentive to ensure success.

If the source of the stake is said to come from savings, the Manager may ask to see statements of your savings accounts to satisfy himself that the cash is really coming from there. Whatever you say as the source of your stake, make sure you can provide evidence if necessary.

If you have an existing overdraft limit and you have reduced the outstanding balance via retained profits over the years, then you can legitimately use the surplus in that facility as your stake. If your average overdrawn balance is N20,000 and you have an overdraft limit of N50,000, you have N30,000 that can be used towards a specific project. All you are doing is utilising past profits or using the equity or Net Worth which has been built up over the years you have been in business. However, make sure you are not using all of your available working capital, especially if your plan is to expand the business.

Some business owners try and put a value on the time they have invested in the project and use that as a stake. The Bank may look favourably on this as there is a cost to your time but, at the end of the day, a good cash stake will go a long way in boosting your chances of success.

Will a lack of a cash stake totally scupper your chances? Not necessarily. If the business case is that strong then a stake may be overlooked but that will only apply to a business with a very long and successful track record. For a start-up, a cash stake is essential.


What Does the Cash Flow Forecast Show?

Your Business Plan will include a Cash Flow Forecast, which as we have seen, estimates your peak overdraft requirement. The Manager will check that the amount you are requesting ties in with your forecast. It’s no good asking for an overdraft limit of N50,000 when your forecast indicates you only need N20,000.

It may not be unreasonable to ask for a small margin on top for contingence purposes but anything out of line will only indicate that you pay scant regard to what your forecasts tell you. The leeway may give you breathing space to sort any problems out without having the bank on your back but to take this view it’s essential that you have financial monitoring systems in place, such as production of monthly figures. This is the key tool for spotting if things are going wrong which we will look at later.


Is The Right Amount Being Requested?

Many business owners don’t like to borrow. They have had it drilled into them either by family members or business colleagues that it’s wrong to borrow. When they realise that it’s necessary to have support from the Bank they try and borrow as little as they can. Their Cash Flow Forecast may indicate they need an overdraft facility of N100,000 but they say that they only feel comfortable with around N20,000 and stick with this.

What happens? The business achieves the level of turnover it was projecting and so larger amounts of cash are needed to fund a growing list of debtors and a bigger stock holding. With an inadequate overdraft limit, the account soon comes under pressure and the small limit is breached time and time again. The way the account is being operated creates a poor impression that could hamper future requests for help.

The moral is that asking for a smaller amount than you really need could ultimately take up more of your time and damage your track record through regular breaches of your overdraft limit. Eventually, realising that you do need a higher limit after all, you have to go back to the Bank and ask for an increase. This involves you having to go through this whole preparation and interview process again, something which could have been avoided if you had asked for the correct amount in the first place! In addition, this doesn’t say a lot about your planning ability.


Does the Amount Requested Look Right?

Common sense comes into play here in assessing this point. If the Manager has a request from an established business to lend say N60,000, but on average all that is being paid into the account each month ranges from N500 to N1,000, the amount asked for looks a little out of line for the size of the business!

Your Business Plan has to present very good reasons as to why the business needs such an amount. What is going to change within the business? How is a rapid growth in turnover going to be achieved and managed? To be seen as a plus point, the amount requested has to “feel” right.

To your success!

Olanrewaju Oniyitan