By Andrew Beattie
27 June 2019
A lot of discussions have occurred recently as to whether banks are still lending to businesses or not. There has been a lot of changes and tightening of assessment criteria primarily on the back of the Royal Commission and whilst it has felt like the banks have closed their books, they are still lending but are far more diligent and selective in where they place their funds and what deals they back. So, if you are a business owner requiring funding you need to be prepared.
What does being prepared look like? Banks, and lenders generally, want to de-risk their position wherever possible. Think about it from the perspective of making an investment. A business needs to articulate the position of a good investment. The more risk for an investor (in this case the bank), the higher the reward they will expect (in this case the interest rate). In my experience, a business needs to be able to answer the following questions:
- Who is the borrower?
This is where to provide information about the business and who are the people behind it. Their experience, competitive advantage, structure, management details etc. Help the bank understand in detail who they are going to be backing.
- What is the money for and why is it required?
This is all about what the funding is for and how it will be used and why the bank’s assistance is required. Help the bank to understand where their money is going and that it is being used for a legitimate commercial reason or need i.e. growth, new equipment etc. They want to ensure this is not a band-aid and that you will not be coming back again for the same issue.
- How does the bank get their money back?
This is all about serviceability (repaying the debt) and security (fall-back position of assets). Banks in Australia are ‘first way out’ lenders meaning they need to ensure the debt can be serviced before even worrying about assets or security. A business needs to be able to show a business case for how they will repay the debt and it is always good to propose what security is available or being offered as well.
Obviously, all the points above for any borrowing request will require supporting information and this is another area that businesses often let themselves down. Essentially the bank only wants to see the information that any proactive and informed business owner should want to see regularly and in a timely manner. At a minimum the information that a business should provide includes:
- Current financial statements and tax returns;
- Year to date management accounts – profit and loss statement (P&L) and balance sheet (B/S);
- Three-way budget and forecast – three-way means P&L, B/S and cash flow statement;
- Ageing debtors and creditors reports; and
- ATO integrated client account and income tax account reports.
If this information cannot be provided or doesn’t exist, not only is it harder with any funding request but the question needs to be asked as to whether the business has the appropriate information to drive their operation and make the right decisions.
Finally, for a business to be in the best position for a funding request it needs a good, proactive relationship with its bank and its banker. Many businesses only contact their bank when they need something however a business needs a banking partner, not a reactive order taker. Even if the news isn’t great include your bank in discussions and keep them informed. Like an investor, a lender doesn’t like surprises.
PKF is regularly engaged to review, provide advice on and negotiate banking security structures, terms and funding strategies. If your business is not getting the banking or lending result you are after or you simply want an independent review, let us know.