8 Jun 2023

Small businesses told to enhance profitability before asking banks for loans

3:43 pm on 8 June 2023
Chris Small, Managing Director,ABC Business Sales.

Chris Small, managing director of ABC Business Sales. Photo: ABC Business Sales / Supplied

Small businesses are being told to get their books in order as banks put more weight on profitability and cashflow when assessing how much to lend to them.

Brokerage ABC Business Sales said tougher economic conditions meant banks were putting more emphasis on business performance and profits over traditional assets, such as cars and property, in an effort to manage risk.

Managing director Chris Small said small businesses should ensure their balance sheets were up to scratch before heading to the bank.

"In the lead-up to bringing your business to market you should prioritise enhancing profitability/cashflow and be able to provide examples of existing management making robust decisions which can clearly be linked to improving the businesses financial performance."

Banks did not want to be put in a situation where they had to force a business to sell off assets against the owners' will either, he said.

He said some small businesses may need to make tough decisions to cut costs in the slowing economic environment.

Finance Link business lending specialist Aaron Brownlee said the construction sector served as an example of how bank lending had changed over time.

"Historically a construction company was valued based on the market value of its fixed assets (diggers, trucks, excavators etc), but now the majority of construction business sales are completed using an EBITDA/EBIT (operating earnings) multiple alongside understanding the effectiveness of the operation's management and other intangible attributes like the location and segment of the market it operates in and banking community believe are most relevant for fun."