Stage 1 · Understand the investor’s decision · Lesson 2 of 4
Why funders say no: ten rules from the field
A large share of refusals is decided before a committee reads the file: the owner gives up, or the account manager sets the request aside, for want of information the funder can check. Here are ten rules drawn from the reasons for refusal documented in the region, each with one thing to do this week.
1. Two kinds of money, kept apart
Keep the business’s money and yours apart
A wholesale grocer in Toamasina (an example invented for the exercise). Some days the till takes 3 million ariary. In the evening, school fees come out of it, fuel for the car, a loan to a cousin. At the end of the month, nobody can say whether the shop made money.
The banker cannot say either, and the file stops there. In South Africa, when banks were asked why they turn down small businesses, they named weak or missing financial information first, about 41% of answers, ahead of collateral, about 21%.
The rule sounds too simple to matter. It has been tested. In the Dominican Republic, shopkeepers took either an accounting course or a few rules of thumb: one account for the business, one for you, and a fixed salary you pay yourself. The accounting course changed almost nothing. The rules of thumb raised sales in bad weeks by about 18%.
This week: open an account in the business’s name if you do not have one, and set yourself a salary. Anything you take on top, record it as an advance.
Sources: Banking Association South Africa, 2018; J-PAL, trial in the Dominican Republic (fieldwork 2006-2008). Both outside the region.
2. The bank, well ahead
Run your takings through the bank well before you ask it for a loan
Who does a bank lend to most willingly? People it knows. A study for AFD of 512 loans to small businesses, in four countries including Madagascar, measured it: credit there « depends heavily on knowing the client », and newcomers are rarely financed. And when they were, the likelihood of the guarantee being called rose to 64%.
Cash sales are real, but the bank cannot see them. In Seychelles, a commercial bank puts it plainly: many small businesses « prefer to keep the cash », and then cannot prove anything.
The fix is slow, but it is in your hands. Deposit your takings, pay suppliers by transfer, and let your account tell the story of your business. Twelve months of statements is a common benchmark, not a rule: each bank has its own period and its own list, so ask yours. And reconcile those statements with your invoices and your accounts: a statement that does not match the rest of the file proves nothing. Kept properly, it becomes your best argument, because nobody could have made it up.
This week: choose the bank you will ask for a loan in a year, and run your receipts through it from now on. When the day comes, « Existing revenue » will state what your statements show, not an estimate.
Sources: Technopolis for AFD, study of ARIZ guarantees, 2019; Seychelles Commercial Bank.
- 3. What is left each year
- 4. Your contribution and the collateral
- 5. Certificate or title
- 6. Your clients, not just your land
- 7. Your accounts, open in advance
- 8. Sell before you raise
- 9. The first risk
- 10. Several applications, no empty field
- What you produce
The rest of the lesson
Keep reading with your free account
9 more parts, with the calculations on your own numbers and what to write in your file. The account is free, no commitment.
The words of this lesson
Each word links to its full definition in the glossary.
- DSCR
- What you earn, divided by what you must repay this year.
- Security
- What the lender can seize if you do not repay: land, a machine, money your customers owe you.
- Land certificate
- In Madagascar, the paper issued by the local council recognising your rights over untitled land; weaker than a title.
- Guarantee fund
- An institution that lends you nothing, but absorbs part of the bank's loss if you default.
- Receivables
- The invoices your customers owe you and have not yet paid.
- Accountant
- The professional who keeps or prepares your accounts. They do not certify them.
- EBITDA
- What your business generates before interest, tax and the wear on your machines.
- Personal guarantee
- You promise to pay yourself if the company cannot. Your house and savings can then be taken.
- Financial model
- A sheet projecting your revenue, costs and cash over three to five years.
From the lesson to your file
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