I last tackled this topic way back in 2017 – after the Global Financial Crisis (GFC). Covid-19 has resulted in great uncertainty for most businesses and it’s time that this article on how to get your bank loan approved be updated to include the latest requirements.
Some things are still true – Your Bank Manager is still NOT Santa Claus. Although banks are currently being really “nice” by extending your loans if you cannot pay because you have been affected by Covid-19, don’t expect this extension to last forever. The day of reckoning will come. There is an expectation that the deferral you got with no questions asked will be repaid within the same term. It is not a debt forgiveness deal, only a deferral.
The fact is your bank manager actually has to do their job too. And much as your nice friendly bank manager would love to help you, he will have to make sure that you still meet certain criteria – or his head will be on the chopping board! The only reason the banks are not checking your current request for a deferral against bank criteria is because the government has ORDERED them to grant any loan deferrals and, in some countries supported it with government guarantees. My cynical self says that they would not have done so if they had a choice.
BANK BUSINESS LOAN CRITERIA
What do you need to focus on when applying for a bank loan? What does your bank look for? The list is now much longer than it used to be. Here’s the quick summary of what you need to do:
1. Evidence of existing financial position
The bank needs to be satisfied about your general solvency as well as be sure that you have enough resources to withstand unexpected difficulty. Covid-19 is a classic – nobody saw this coming. Usually, the bank will ask for the last 3 year’s financial statements with the most recent being as current as possible. Giving them financials that’s 2 years old will not cut it!
Herein also lies a potential sleeper problem. Whilst we have been told that our credit rating will not be affected by the loan deferrals, it would appear that this is not quite true. Your credit rating WILL be affected. Read the article written by an Australian financial journalist on this. Somehow, I suspect the same will apply all over the world.
2. How much do you need and what is the loan for?
It will not be enough for you to ask for money for “working capital” or for “expansion”. Your application must “spell out” the requirement – this is the reason why your bank will often ask for projections and budgets. If you have a Business Plan, hand that over to the bank. The purpose of the loan is important because the bank will want to satisfy itself that the purpose will enhance, rather than detract from, the financial health of the business.
3. Is the proposition sound?
The key issue here is can the business generate enough income to service all the commitments. In assessing this, your bank manager has to learn (and learn quickly) about the existing business and the industry. Therefore, one of the objectives should be to bring your bank manager up to speed in this matter as comprehensively and as quickly as possible.
4. Can you service the loan?
One of the biggest hurdles to overcome, and the one upon which the assessment will hinge, is to determine that the repayment program can be serviced. No bank will lend you any money if you are unlikely to be able to repay it. Therefore, provide your bank with realistic budgets or projections including the underlying assumptions used showing the business’s ability to generate a sufficient cash surplus to cover the loan. There is no point trying to “enhance” the figures. At the end of the day, if the business goes belly-up, you will pay – not the bank.
Gone are the days of low doc loan applications. Gone are the days of the bank simply accepting your information as truth without verification. Now, banks want to know exactly what you’re spending your money on – right down to your daily morning latte. They will now ask for the last 3, sometimes 6 months of your transaction accounts and do a detailed analysis.
5. What security can you offer?
Very few banks will lend you money if you can’t provide any security (despite talk by most banks that they will lend on cash flow). Personal guarantees will be required – so you will find your limited liability company will not protect you from the clutches of the bank should the business prove to be a failure.
6. Can you be trusted?
The personal element also enters the equation. To put it bluntly, a bank manager will not approve a loan to someone he/she cannot trust. On the other hand, bankers will often offer support, at some risk, to borrowers who exhibit drive, integrity and a competent business capacity.
There is also a propensity to “trust” certain professions more than others. The professions tend to do well here with banks often giving an extra discount if you’re a member of a certain professional body. If you have only just started a new business, you will most likely have to provide at least 2 years trading history before any bank will consider your loan application.
7. Independent Credit Departments
Most Bank Managers are now required to pass all bank loan applications via their faceless credit department who only seem to be interested in ‘ticking the boxes”. Whilst they can submit your application to the credit department with a recommendation to approve, the decision no longer rest with the manager. So, help them out and make it easy for them to tick those boxes.
8. Be wary of credit card limits
Do you know that most banks will also take your credit card limits into account – even if you have always paid out your card balance in full each time. The old days of having several cards with high credit limits will work against you in a loan application. For example, if the bank worked out that you have a borrowing capability of, say $500,000 but you have credit cards with a total limit of $100,00, they will only lend you $400,000.
Therefore, to sum it all up, if you have never been in business and you have no security to offer, don’t expect your bank to hand over any money. It will not matter how good the idea is or how fantastic the opportunity is – your bank is in business to make money for their shareholders, not to support you.
About the Author:
Patsy Lim’s business and financial background (having qualified as a Chartered Accountant in 1980), together with her entrepreneurial spirit enables her to apply a potent blend of strong financial and accounting expertise, deep practical business experience, and entrepreneurial flair and creativity to complex business problems. As an entrepreneur, she understands the issues that an entrepreneur faces. So, unlike some accountants who only know the theory of business, Patsy has had hands-on experience of what it means to be IN business, to start a business, to grow a business, and most of all, to manage a business when times inevitably get tough!