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What’s the connection between appetite & Money?

The first time I met the term “appetite „within a financing deal, I could not understand the meaning of appetite when it is not related to food. As a fan of food I could not really figure it out, how can a bank or investor doesn’t have a great appetite like mine…
By Osnat Peled, Mentor for Business Excellence and director of Mentor Finance.

In reality, when approaching any kind of financing, it is probable you will hear a lot the sentence – “we do not have an appetite for such a deal”, which actually describes the scenario where a bank or an investor is strictly saying– “we are not interesting to finance you”. In such a situation, I believe it is important to take a moment and check where it is coming from, and more importantly, how we can “open this appetite” of the financier and avoid the negative response.

The meaning of having an appetite

Banks and investors look at a deal from their narrow point of view, mainly in 2 major aspects – the Risk aspect and the earning aspects. Meaning – how much are we going to risk? What will be our level of exposure to the deal?  How can we reduce the risk and make sure that we will have our investment returned, including the risk we engaged in?  Only after the risk is moderate to the level which is satisfying your financiers or investors, they will also calculate their profits– meaning what kind of profits they are going to have from this loan or investment (for example by using an interest rate or other methods).

The combination of the risk and the expected profits creates an appetite, which can be high or low based exactly on these two aspects. As easy as it sounds, the role you now have in this game is actually to reduce the risk and increase the expected profits. So simple but yet challenging!

The Risk factor

A young entrepreneur had a dream to produce unique Italian ice cream and sell it in a magical spot in the Lipscani area (Bucharest). She decides to dedicate the life dream and approach the bank, asking for a small loan of 10,000€ for investing in the place, equipment, and a little advertisement. But when she approached the bank, she immediately received a negative answer. Why is that? Because the bank immediately spotted that her request is a high risk one. It does not matter, she is only asking for 10,000€, considered to be a microloan for any kind of bank, it is likely she will get  “No” based on the low “appetite” the bank has for her case.

Counting the risk approach, the bank sees 3 major high-risk elements in her case – being a startup (meaning no track records of other business activities), she is young and a beginner (meaning, the risk of making business mistakes is high), the domain is the food business (considered to be the highest one in the risk assessment).  If we look closely at this case, the bank might think the concept is good (Italian high-quality ice cream is yet a unique concept in Bucharest) and the location she chooses is a good one – Lipscani which is considered being a good location for this purpose. The bank will take a closer look at her business plan and will analyze the way she is planning to reimburse the loan from her incomes, or maybe by having other sources of income. The bank will also check her background in sustaining this business, the know-how she brings on how to make Italian ice cream, her business plan, marketing strategy, etc.

Let’s open the appetite...

The bankers are experienced professionals and they will identify on the spot the “weak points” of your plan.
Taking into consideration the bank’s approach, and assuming we wish to open the appetite of the bank, we shall tackle (in advance) every obstacle the bank is raising and advise to be prepared to reduce the risk to the minimum level we can achieve. We can tackle the points one by one before we apply to the bank, the same as the bank will do.

Do not forget, banks are ready to take risks, it is their purpose, but they will not be ready to be too exposed and they work in according to a strict guideline to reduce for maximizing their exposure, mainly when it is related to start-up companies;

It is possible you will meet on the way some financiers (usually non-banking ones / IFN) who are ready to take higher risks, usually they will charge higher fees (interests) which calculate the risk inside or will ask to be in a majority position within your business (partnership) until you reimburse the loan.  Banks are usually among the financial institutions which are proposing the lower interest on the market, however, it is most likely that the bank, identifying that they are fully exposed and have no guarantees that you can actually return your loan and will request in this case to add another guarantee (like an asset) or a guarantor.

This can be an annoying request, but a reasonable one when the risk is high. In such a case, there are several ways to provide guarantees…we will meet them in our next article!

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Osnat Peled, General Director of Mentor Finance (from Mentor group Holdings consortium) has relocated to Romania from Israel. Having 19 years of business experience she has been working with banks, governments and leading companies in assisting them to achieve their business goals and recruit financing.
Mentor Finance provides financing solutions to companies, developers, entrepreneurs and NGOs in all types of domains.


Foto: Sebastian Moise  Make-up: Monica Panait    Şedinta foto a avut loc la Hotel Prince Park Residences Bucureşti   *Articol apărut în Business Woman Magazine, ediţia 64

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