Businesses owners and their advisors need to be able to clearly and compellingly articulate why their lending proposition should be supported by the Bank. This needs to occur with every communication with the Bank including new loan submissions and amortization review meetings.
The Lenders have predetermined Key Performance Indicators (KPI’s) to retain customers and find new ones. Each year their clients pay off a component of the principal loan amount. Hence the Bank needs to replace this just to keep making the same EBIT that they did last year. This is obviously before they achieve their growth targets.
To assist Business Advisors in preparing clients for a bank loan submission, the following fifteen questions should be considered. These are not exhaustive and should be considered as a guide to assist with loan material preparation.
- Can you pay the Bank back – The Serviceability Test
- Does the business generate sufficient operating cash to cover the interest and principal reduction with room for a possible interest rate increase?
- Do you know the quality of the cash flow – is the finance required to fund growth or is it required to cover a cash shortage due to changes in financial performance?
- Do you have fast growth indicators that signal that volume is detrimental to cash?
- Do you have the right mix of short and long term funding?
- Does the business have liabilities that might jeopardise the Banks position i.e. income tax, GST, key suppliers with substantial outstanding dues?
- Do you have correctly prepared budgets and cash flows that substantiate your future plans?
- Are there external environmental factors and industry trends that might adversely or positively impact on your profitability, ie competitors, regulation, emerging markets etc?
- Are your working capital levels appropriate and trending reasonably?
- Can the business demonstrate future viability and growth to support its funding requirements?
- Does the business generate a sufficient return on capital employed for its shareholders?
- Do the Directors have a clean credit history and the business a clean trade credit history?
- Do Directors have sufficient equity in the business relative to other creditors?
- Does the Bank have sufficient security?
- Is there an active market for your business should it need to be sold as a going concern or liquidated?
Using strategic lending assessment tools may assist in the articulation and preparation of materials required by Lenders to generate success with loan applications. While Advisors use this software for financial diagnostic assessment Banks use the software for risk assessment. Understanding both sides of the table is critical to ensure that your, and your client’s, business is sufficiently funded to meet the needs of future growth and financial survival.
Remember businesses speak Spanish and Banks speak Portuguese. They sound the same but are often completely different. If you don’t speak to them in their own language it is likely that they won’t understand you.
Given that Banks are only likely to get tougher to deal with over the in the future, be ahead of your competition by attending the Smithink 2020 Business Advisory Conference on February 12 and 13 at Palazzo Versace, Gold Coast. Click here for further details and to register: http://www.smithink2020.com/events/business_advisory_conference
Mark Holton, Smithink 2020
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