Banks are actively lending, but obtaining new business loans can take a little longer even for the well- prepared business owner, writes Steve Wilson.

The decision of many owners to approach a bank for new finance for their business can often be fraught with trepidation. Quite often the fear of outright rejection, cost, or even the amount of information required to be prepared can be enough to dissuade owners from obtaining the support of a bank for its business. However, it certainly does not have to be this way especially for the well-prepared business owner.

Banks are finding it more difficult and expensive to raise funds, so the limited funds they do have are deployed, both to get the most bang for their buck in terms of return, but even more importantly in terms of credit quality.

While a bank can increase its revenue by taking on higher risks and charge accordingly, preservation and protection of capital are more critical. Banks are already highly geared businesses and accordingly can ill afford further blows to their capital bases, besides higher margins never compensate for a bad debt.

Although banks are restricted in the funds available to lend, they and the markets still hold expectations of increasing shareholder returns. In these circumstances, banks tend to only lend where it is absolutely safe, which usually means quality customers with solid businesses. This more cautious approach is increasing the time it takes for banks to approve new loan applications.

It is now very common for banks to seek more detailed financial information from borrowers as part of a loan application. This includes business plans, three-way profit & loss, cash-flow and balance-sheet forecasts, as well as historical business activity statements and tax returns. Banks also like to see that projected financial information is supported by detailed assumptions, particularly for the profit & loss statement, to enable a detailed assessment and “stress testing” techniques.

Banks have access to array of industry and government databases (e.g. ATO, ASIC) at their disposal from which to access information and/or validate information received from borrowers as part of assessing a new loan application. Relationship managers also generally tend to “drill down” into more detail about the historical and projected financial performance of the business and make further enquiries about the need for the finance.

Since the GFC, credit approval processes of banks have changed with district or regional credit executives engaged earlier in the business loan approval process. This is aimed at assisting the relationship managers in assessing and structuring new loan applications, as well as identifying and mitigating against any credit or business risks of the borrower. These “credit workshops”, while valuable for the bank to undertake, invariably increase the loan application approval time – sometimes by up to two-to-four weeks depending on the complexity of the transaction.

For larger business loan applications (i.e. greater than $10m) banks often engage Big Four accounting firms to undertake “pre-lending reviews” which, inter alia, provide an independent and detailed assessment of the credit worthiness of the borrower and its financial position. The cost of these pre-lending reviews can be expensive and are generally borne by the borrower regardless of whether the bank ultimately approves or rejects their loan application.

In some circumstances, loan applications cannot be approved by regional or district executives (given the size) and have to be approved by “head office” credit executives who may not have had any face-to-face contact with the borrower during the loan application process. This can also increase the time taken by the bank to respond to borrowers. Due to additional due diligence, the banks are generally taking longer to make decisions on new loan applications.

Notwithstanding the internal credit approval processes of the banks, business owners need to ensure they are very well prepared prior to approaching a bank with a new business loan application. By doing so, borrowers improve the likelihood of a favourable decision by the bank to their funding request and that a decision is reached in a timely fashion with no unnecessary delays.

Business owners should consider trusted advisors or accountants to assist them with their business loan application. They can play both a pivotal role in assisting with the preparation of financial information, set agreed timetables and lead negotiations with a bank ensuring a positive outcome for the borrower is maximised.

Some of the key information business owners should have available prior to approaching a bank for new finance for their business includes:

  • Detailed business plan (including risk analysis – i.e. things that could go wrong in the business and how these would be dealt with).
  • Customer Value Proposition (i.e. the unique set of product and service benefits the business offers its customers).
  • Three years of historical financial information (including business activity statements and tax returns).
  • Three-way projections (i.e. profit & loss, cash flow and balance sheet) reconciling to each other.
  • Succession planning strategies (i.e. exit mechanisms).
  • The need for the finance clearly communicated ensuring the bank understands what you are looking for and when.

Borrowers should always adhere to the information requirements of the bank as part of the loan application process. If in doubt, provide more not less, but importantly double check that the information is accurate as creditability can be quickly tarnished when errors are discovered.

Steve Wilson established Hawkview Partners in 2010 to assist clients secure debt and cash-flow finance for their businesses. Steve has over 20 years banking and finance experience including working in the business lending areas at a major financial institution in credit and relationship management roles. Hawkview Partners has also achieved success for clients in selling and buying businesses, capital raisings, business valuations, strategic planning and corporate restructurings. Steve can be contacted on 0425 661 140 or email: steve.wilson@hawkview.com.au

www.hawkview.com.au