At the end of the day, banks are businesses just like you and so they will only invest in strong deals, just like you would. When they look at your loan applications, they are calculating the financial risk of entering into an arrangement with you.

At the end of the day, banks are businesses just like you and so they will only invest in strong deals, just like you would. When they look at your loan applications, they are calculating the financial risk of entering into an arrangement with you.

Navigating this arrangement can be tricky and sometimes overwhelming, but the Perks Banking and Finance team work closely with you, and the banks, to ensure that a compelling case is presented to the lenders. Here we discuss some of the key considerations you need to be aware of when getting organised to borrow money.

What the bank considers
For the bank, the most important element of financial risk is whether you can comfortably and reliably repay your loan and the interest it will accrue during the agreed loan term.

According to the Australian Bureau of Statistics, as of June 2017, the exit rate (the percentage of businesses that ceased operating) across all Australian businesses was 12.0%(1). Therefore, to ensure it protects itself, the bank will look for convincing evidence that your business won’t be included in these statistics and ultimately unable to repay the principal loan.

When assessing financial risk, another main factor the bank looks at is YOU – the business owner. What are your strengths, skills and experience? Do you have a thorough understanding of your business, the risks involved, and a clear, realistic plan for growth? Importantly, your credit history and any debt you may have, will also play a key role in your profile.

Banks will also look at:

  • Cash flow: ASIC reports(2) that inadequate cash flow is one of the top reasons why businesses are unable to repay debt. The bank will want to see what revenue you have coming in, and see that you can pay wages, keep the business ticking and make your loan payments on time – even if something unplanned takes place.
  • Industry: Taking conditions such as competition, profitability and economic climate into consideration, lenders view some industries as riskier than others. If your business operates seasonally, the bank will want to know how you’ll manage repayments in the off season when business is quieter.

Show the bank you’re managing risk
Having higher risk doesn’t mean that you won’t get a loan. There will just be greater emphasis on showing lenders that you’re aware of the risks and are taking the necessary steps to manage them.

At Perks Banking and Finance, we will work with you to create a risk management profile to accompany the loan application. This document includes an assessment of your business’s specific (financial and other) risks and details the steps you are taking or have implemented to manage them.

The next step is to prepare your loan application, which the Perks Banking and Finance team can do on your behalf. The loan application helps to convince lenders that you’re on-top of your business risks. As part of the loan application process it is important to provide:

  • All the documentation the bank asks for
  • A business plan to succinctly explain what your goals and target markets, including financial forecasts
  • Solid evidence of your personal experience and credentials and demonstrate that your financial records are in good order.

Convincing the bank that you’re on top of risk management is about understanding your business, having robust systems in place, adequately planning for the future and demonstrating that you’re on top of current and future risk.

If you need any assistance with putting a risk profile together, or preparing a loan application, please don’t hesitate to contact Bruce Debenham at bdebenham@perks.com.au or 08 8273 9300.

 

Sources:
1. http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/8165.0Media%20Release1Jun%202013%20to%20Jun%202017?opendocument&tabname=Summary&prodno=8165.0&issue=Jun%2020 13%20to%20Jun%202017&num=&view

2. http://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-436mr-asic-reports-on-corporate-insolvencies-2015-16/#table3