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how many times the loan interest is covered； and gives the lender some
idea of the safety margin。 The ratio for this example is given at the end of
Table 2。1。 Once again rules are hard to make； but much less than 3× interest
earned is unlikely to give lenders confidence。 （See later in this chapter for a
prehensive explanation of the use of ratios。）
BORROWED MONEY
Towards the lower…risk end of the financing spectrum are the various
organizations that lend money to businesses。 They all try hard to take li。。le
or no risk； but expect some reward irrespective of performance。 They want
interest payments on money lent； usually from day one； though sometimes
they are content to roll interest payments up until some future date。 While
they hope the management is petent； they are more interested in
securing a charge against any assets the business or its managers may own。
At the end of the day they want all their money back。 It would be more
prudent to think of these organizations as people who will help you turn a
proportion of an illiquid asset； such as property； stock in trade or customers
who have not yet paid up； into a more liquid asset such as cash； but of
course at some discount。
BANKS
Banks are the principal； and frequently the only； source of finance for 9 out
of every 10 unquoted businesses。 Firms around the world rely on banks
for their funding。 In the UK； for example； they have borrowed nearly ￡55
billion from the banks； a substantial rise over the past few years。 When this
figure is pared with the ￡48 billion that firms have on deposit at any
one time； the net amount borrowed is around ￡7 billion。
Bankers； and indeed any other sources of debt capital； are looking for
asset security to back their loan and provide a near…certainty of ge。。ing
their money back。 They will also charge an interest rate that reflects current
market conditions and their view of the risk level of the proposal； usually
anything from 0。25 per cent to upwards of 3 or 4 per cent for more risky or
smaller firms。
Bankers like to speak of the ‘five Cs’ of credit analysis； factors they look
at when they evaluate a loan request。 When applying to a bank for a loan；
be prepared to address the following points：
56 The Thirty…Day MBA
。 Character： Bankers lend money to borrowers who appear honest
and who have a good credit history。 Before you apply for a loan； it
makes sense to obtain a copy of your credit report and clean up any
problems。
。 Capacity： This is a prediction of the borrower’s ability to repay the loan。
For a new business； bankers look at the business plan。 For an existing
business； bankers consider financial statements and industry trends。
。 Collateral： Bankers generally want a borrower to pledge an asset that
can be sold to pay off the loan if the borrower lacks funds。
。 Capital： Bankers scrutinize a borrower’s net worth； the amount by
which assets exceed debts。
。 Conditions： Whether bankers give a loan can be influenced by the current
economic climate as well as by the amount。
Types of bank funding
Banks usually offer three types of loan：
。 Overdra。。s： Though technically short…term money as they can be called
in at a moment’s notice； these tend to form a part of the permanent
capital of a business； albeit a fluctuating one。
。 Term loans： Offered for set periods。
。 Government…backed loans： These are available to some types of business；
usually small or new ventures； where the banker’s normal criteria
might not be met； but the government would like to encourage the
sector。
Overdrafts
The principal form of short…term bank funding is an overdra。。； secured by
a charge over the assets of the business。 A li。。le over a quarter of all bank
finance for small firms is in the form of an overdra。。。 If you are starting
out in a contract cleaning business； say； with a major contract； you need
sufficient funds initially to buy the mop and bucket。 Three months into the
contract they will have been paid for； and so there is no point in ge。。ing a
five…year bank loan to cover this； as within a year you will have cash in the
bank and a loan with an early redemption penalty！
However； if your bank account does not get out of the red at any stage
during the year； you will need to re…examine your financing。 All too o。。en
panies utilize an overdra。。 to acquire long…term assets； and that overdra
。。 never seems to disappear； eventually constraining the business。
The a。。raction of overdra。。s is that they are very easy to arrange and take
li。。le time to set up。 That is also their inherent weakness。 The key words in
the arrangement document are ‘repayable on demand’； which leaves the
bank free to make and change the rules as it sees fit。 （This term is under
Finance 57
constant review； and some banks may remove it from the arrangement。）
With other forms of borrowing； as long as you stick to the terms and conditions；
the loan is yours for the duration。 It is not so with overdra。。s。
Term loans
Term loans； as long…term bank borrowings are generally known； are funds
provided by a bank for a number of years。
The interest can either be variable； changing with general interest rates；
or fixed for a number of years ahead。 The proportion of fixed…rate loans
has increased from a third of all term loans to around one in two。 In some
cases it may be possible to move between having a fixed interest rate
and a variable one at certain intervals。 It may even be possible to have a
moratorium on interest payments for a short period； to give the business
some breathing space。 Provided the conditions of the loan are met in such
ma。。ers as repayment； interest and security cover； the money is available
for the period of the loan。 Unlike in the case of an overdra。。； the bank
cannot pull the rug from under you if circumstances （or the local manager）
change。
Just over a third of all term loans are for periods greater than 10 years；
and a quarter are for 3 years or less。
Government Small Firm Loan Guarantee Schemes
These are operated by banks at the instigation of governments in the UK；
and in Australia； the United States and elsewhere。 These schemes guarantee
loans from banks and other financial institutions for small businesses with
viable business proposals that have tried and failed to obtain a conventional
loan because of a lack of security。 Loans are available for periods between 2
and 10 years on sums from ￡5；000 to ￡2；500；000。
The government guarantees 70–90 per cent of the loan。 In return for the
guarantee； the borrower pays a premium of 1–2 per cent per year on the
outstanding amount of the loan。 The mercial aspects of the loan are
ma。。ers between the borrower and the lender。
BONDS； DEBENTURES AND MORTGAGES
Bonds； debentures and mortgages are all kinds of borrowing with different
rights and obligations for the parties concerned。 For a business a mortgage
is much the same as for an individual。 The loan is for a specific event； buying
a particular property asset such as a factory； office or warehouse。 Interest
is payable and the loan itself is secured against the prop