I often hear from entrepreneurs that Banks are being difficult and impossible about granting loans to business owners. And vice versa, banks have been complaining recently about fewer attractive loan opportunities in the Dutch Caribbean market. So how to get out of this quagmire?? Even the “College Financieel Toezicht” (the Board of Financial Supervision of the Kingdom of The Netherlands) made a remark last year that called on commercial banks to ease their (strict) credit policies and support the endeavors of entrepreneurs to jump-start the economy of the Dutch Caribbean islands. But that is not enough to encourage banks to lend money faster and easier to businesses.
The best thing an entrepreneur can do is to prepare himself and his company for being bankable!
The following are a few steps any entrepreneur can take to prepare for the big loan that will take their business to the next level. Some of these tips might seem counter-intuitive, however after 20 years of experience in financial and banking space, these tips will certainly get you much closer than you ever imagined!
1. Profit tax vs. Cash Flow!
Operating in one of the jurisdictions that has one of the highest tax burdens in the world is not encouraging for Small and Medium sized Enterprises (SME’s) to report true and significant profits. As a matter of fact, it is not uncommon for SME’s to show Net Losses in consecutive years to lower/avoid the profit tax burden on their company. The flipside of this strategy is that it diminishes your chances of getting a loan approved at the bank as the bankers will argue why they should finance a loss-making company.
The good news is that the corporate profit tax for Curaçao has been reduced to 22% for 2016 (from 25% in 2015). And of course there are numerous great tax strategies that will lower your profit tax bill for the Inspectorate, but still allow you to show healthy cash flows for your Banker.
It also helps to certify your financial statements. Get your financials independently prepared by a 3rd party accountant, or better yet, have them reviewed or audited that allows the Banker to gain significant comfort with the reliability of your numbers!
2. Build your character – or better yet: a Credit History!
Bankers often look to the past on how you, as a business owner and person, have made good on your obligations towards your bank. Even a personal car loan or mortgage will provide bankers with a great source for checking your “credit history” in the absence of a fully functioning Credit Scoring system or Credit Bureau that are available in countries like the USA and The Netherlands. So start off small, with a car loan or a personal loan and pay it back accordingly, or even before it is due. This will send a strong message that you’re a person that keeps his word – you have a credit history so you have character!
The same goes for paying your other dues. The most important, and often ignored are taxes! Banks are more frequently asking for tax returns and tax payables to assess your credit risk as a borrower.
Unfortunately, this is where most loans for SME’s get stranded because of the lack of ‘hard collateral’. What Banks are generally looking for is a piece of real estate, cash or bank guarantees. Items that a budding entrepreneur seldom possesses. Bummer! However, this is where some creativity of an entrepreneur has always surprised me when I worked at the bank. It really comes down to how much they really believe in their business and/or product. I have seen entrepreneurs come in with family members that take a stake in the business in return for allowing the bank to place a mortgage on their house or a pledge on the family member’s bank account. Risky! And sadly I have seen mothers lose their house because of their misplaced business ideas of their children. Nevertheless, it is a necessary rite-of-passage for understanding what is really at stake and improving on their skills and tactics for the next challenge.
There are a myriad ways of solving this problem, but often it means that the time might not be right to approach a commercial bank for your financing needs. Given their relatively risk averse credit policies, it might be better to raise the initial capital for your business through other channels. And the good news is that these other funding channels are becoming easier to access! There are already a few companies in Curacao that have successfully raised initial capital through Crowdfunding! But the most common forms are through family and friends. Approaching equity (or angel) investors is also growing as they are easier to find through online channels.
When you have secured the financing you need, the challenge is then to stay focused on building a valuable business. A business that is bankable and sustainable for the future. Look out for our next Blog in which we will talk about our Value Builder System – that delves into essential factors to consider when building a business that is sellable AND bankable!
Written by; Bharat Bhojwani BSc, MBA