OPINION: The challenges of first time buyer finance

First time buyers have always had challenges when accessing finance to purchase a business. I certainly did, so here is my experience and the lessons I learnt.

The first two decades of my retail career were with WHSmith. During those years I worked my way from sales assistant to branch manager, learning a great deal about people and frontline retailing.

When I left that part of my life behind to buy my own business and needed a loan from a bank, I discovered that my experience gave me no traction at all with the bank manager. He saw it as valueless – quite a surprise.

I knew the assistant manager of the branch of the bank as I had managed the WHSmith’s store next door for a couple of years so at least I had a warm reception on a personal level. He told me I needed to give him a very good case as to why I should be loaned the cash I needed to complete my purchase.

Business plan essentials

To build a strong foundation for my case, I put together a 25-page business plan. This included details about:

• My background, training and skill set
• The details of the business that I proposed to buy
• My analysis of the strengths and weakness of the business as it was being run by the vendors
• My analysis of the three years’ profit and loss accounts that the vendors had provided
• A 5 year sales, costs and income budget including a breakdown of how the target Gross Profit would be achieved
• A weekly cash flow projection for the first three months and then monthly for the first three years
• My proposals for improving the business following purchase
• The details of the investment that my wife and I would be making into our new venture

The business plan explained the ways that I was not going to fail in my new role as an independent retailer.

I remember the loan application interview was a very friendly affair. The assistant bank manager told me that I had clearly produced a strong business plan, much better that the majority he saw which were often very limited in detail and rarely on more than one side of paper.

The big snag was that because I would be taking on a leasehold store with accommodation on the first floor, I could not offer any form of bricks and mortar security for the loan. I had not passed the “Why should we risk lending money to you?” test.

The solution was for my parents to act as guarantors and offer their house as security to the bank. With this in place, the bank granted the loan – 32% of the funds that my wife and I needed to complete the purchase and provide sufficient working capital.

I applied for this first business loan in 1988 and in the many conversations that I have had with bank managers since then, I have always been told the same: banks want to have the comfort that if the business fails they will not lose out.

When I changed to another high-street bank six years later, I had a track record of operating a profitable business to support the second loan request. The negotiation went very smoothly and although I was still a tenant, my new bank did not need any form of security.

The key lesson is that until an independent retailer has proved themselves as a capable business person on their own account, they just don’t have a track record to show a lender.