In the world of Finance, it often becomes apparent that clients, their accountants and their bankers speak a different language. The questions of ‘What will the bank want to see?’ or ‘Why are they asking me for this?’ are often asked.
As commercial brokers and debt advisers, the Perks Banking & Finance team’s task is to break down this language barrier so that the process from “I would like to borrow money” to “Thank you for lending me money” is simple and seamless.
It is important that you and your business are well prepared when you are seeking to borrow money. Whether you need a working capital facility or a term loan, the process to follow and the information required is, nine times out of ten, the same.
Below are some pointers to illustrate to you how banks think and how we approach them to assist you in getting your loan ‘over the line’.
When you apply for a loan your bank will typically review what is commonly referred to as the 3 C’s: your Character, your Capacity to repay the loan and the Collateral (security) that you will provide to support the loan. Your bank will also want to chat to you about the risks you and your business face and what plans you have in place to address these if they arise. This is something your accountant can assist you in working out.
When assessing your Character, a bank will typically focus on your track record and experience and will typically ask for the following information to assist in their assessment of your Character:
- An up to date copy of your CV showing your experience;
- Credit reports on you and your business;
- Copies of bank statements;
- Details of the advisers you use, e.g. accountants, lawyers, industry specialists; and/or
- A business or strategic plan.
The assessment of Character is the most important of the 3 C’s. If you cannot meet the Character test it is highly unlikely that you will be successful with your loan application.
When assessing your Capacity to repay the loan, the bank will want to review the historical and forecast income and expenditure of your business to make sure the business can generate enough cash to pay the interest – and ultimately repay the loan.
During this process, your bank will rely on the information that you provide to them, so it is important you gather the right information and present it clearly. There are several ways the bank will assess capacity:
- interview you and ask you questions about you and your business. It is important to be open and honest with your responses;
- independently review and check the information; and/or
- speaking to suitably qualified people such as your advisers, industry specialists, etc.
The bank will consider your capacity to repay the loan as the primary source of repayment, i.e. the cash generated from your business will be applied to pay ongoing interest and to ultimately repay the loan the bank provided you.
The role of your accountant/advisor is an important part of your loan application process, especially when it comes to proving Capacity to repay the loan.
The Collateral is the property or assets that you give to the bank to secure your loan. In most instances this is your home, however banks will also look at the strength of the balance sheet that supports your business. When assessing Collateral the bank will look at:
- the current market value of the assets;
- the liquidity of the assets (ie how easy it is it to sell the assets); and
- the quality/condition/age of the assets.
The bank will ask for information such as up to date valuations and depreciation schedules to assist in their assessment of the Collateral that you are giving the bank to support your loan.
Applying for a loan can be viewed as a daunting task, however, if you are well prepared, properly informed and have an advisor that understands how banks operate, the process will be far easier for both parties.
If you require any assistance with your banking and finance needs, please don’t hesitate to contact Bruce Debenham, Director Perks Banking & Finance. 08 8273 9223 or firstname.lastname@example.org