Analytics, Banks, Direct Speech, Financial Services
International Internet Magazine. Baltic States news & analytics
Wednesday, 06.11.2024, 13:24
When the Impossible is Possible
The answer is simple and complex at the same time, so let's
figure it out. Certainly, there are golden rules for preparing a loan or
investment project which are described in serious textbooks and include a
well-grounded and well-calculated business plan, the experience of participants
in the proposed area, successfully implemented projects, as well as own
financing in the amount of 20-30% of the project budget. These rules do work
and they are important of course. It would seem that what one needs to do is
just hire smart guys who will help in preparing the entire documentation, hire
experienced managers and go ahead - conquer new Mont Blancs and Everests of
business. Then why is it difficult?
Each successful project, of course, has its own story; but
there are also universal, fundamental points that are relevant for many, if not
most. Here, we are definitely not talking about “standard” loans with 100%
collateral, but about more complex and ambitious projects. Further on, I will
mention some of these and will try to give several tips.
The main difficulty often lies in the fact that good and
even great business ideas come from those who simply cannot meet the standard
terms and conditions of bank lending. From my experience, I can say that this
happens much more often than one might think. And it's not just about those
computer geniuses, whose revolutionary ideas can only be evaluated and financed
by business angels who are equally advanced.
Let's say, a company with experience and a good reputation
has decided to launch a new line of extraordinary, but very promising food
products. The market analysis and the comparison with peers promise excellent
prospects. First, one needs to purchase equipment, modernise production, and
prepare for entering new markets. However, the amount of collateral and free
funds available is not sufficient to meet the terms and conditions of the bank.
At this point, a wall
usually arises, which cannot be broken through with the help of any convincing
evidence of future success and profits. Because in standard practice, a project
that does not fall within the given framework just does not work. A loan
officer can understand everything and wish success to the applicant, but the
requirements and circumstances prevail.
Hence, the first and main advice is to search for a bank and
a banker who is ready to be flexible and look at your business as broadly as
possible. Financing of promising projects that “do not meet the standards” can
not only be organised in the form of classical lending. In such cases,
combinations can be used; for example, a loan plus an investment component or a
mezzanine. This form of cooperation, which is sometimes called “smart
financing”, often turns out to be more beneficial for all parties – both for the
bank and for the client. Another thing is that it requires much deeper
involvement in the project and more thorough work on the part of all of the
participants, including comprehensive analysis, presentation to the target
group, the search for effective nonstandard solutions, analysis and control of
risks. Not all credit institutions are ready for this.
Here's another situation that has been encountered quite
often recently. There is a company that is successful, efficient and modern. It
was established in the 1990s or the 2000s. Sometime later, its shareholders
attracted new management for their business who carried out successful reforms
and brought the company into an excellent condition. Currently, the founders
are planning to retire, and the top management of the enterprise is ready to
buy out a controlling stake from them; however, they do not have enough funds
for such a transaction, and it is almost impossible to obtain such under the
usual credit scheme.
The problem has been solved through “smart financing”, which
includes loans and a certain amount of investment. Such approach justifies
itself and works very well in practice. We have already received a number of
similar applications this year. Most of them have good potential and I hope
that we will help to unleash it for many of our clients.
The second important tip is that you have to believe in your
idea. As corny as it sounds, it is a completely practical and vital point. The
opposite is also true: if you do not really believe in your idea, do not “live
with it 100%”, and are not ready to fight for it to the end, then no one else
will believe in it either, and certainly not a bank loan specialist.
Now we are negotiating with a young food production company
from a neighbouring Baltic country, which is ready to launch a virtually new
product on the market – absolutely natural, fully “green” and, at the same
time, delicious. They want to export it to Great Britain, Japan, Germany and
other promising markets. The quality that they have been able to achieve is
really impressive – and this is against the background of many world analogues.
The production cycle is a complete “chain” – from growing in the garden to
packaging the processed end product.
When you communicate
with them, you understand: the guys believe in their work, are fully into it
and also know how to convince people of this. And what is most important, they
do not just believe in it in an abstract way. They had calculated and planned
everything, had made a pilot project, which confirmed their financial
prerequisites, had studied sales markets and had even made a portrait of their
end customer who would buy their goods at a store in, say, Tokyo or Liverpool.
Thus, the third tip: come to the bank with your project perfectly prepared and
focused. Over the years of my career, I have been involved in negotiations with
hundreds of entrepreneurs, and I am still amazed that many of them come to the
most important first meeting without the required preparation and mood.
Believe me, it is during the first meeting that foundations
are laid, which can solve a lot later, if not everything. If you cannot answer
simple questions straight away, for example, about the staff you will need,
about the target audience of your product or service, about the procedure of
your sales and about your partners in this business, then your interlocutor
will most likely put a mental cross on your project at once. And, as experience
shows, in most cases he will be right. On multiple occasions, I really found
out later that if something seemed to be strange, incomprehensible or unviable
at first impression, it was like this in reality.
Nobody is immune to mistakes. We, banking specialists, who
deal with dozens of business cases every day, who are familiar with hundreds of
business people, understand this as well as others. Still, mistakes that can be
foreseen and avoided should not be made. And finally, even if you have already
been rejected somewhere, but still have reasons to believe in your business
idea – do not stop, continue, and look for new solutions, as a journey of a
thousand miles begins with a single step.
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