Wednesday, 2 November 2011

Why Banks Say NO

To hear people talk these days you’d think the Banks were always saying no. It is easy to forget that an essential part of their business is to lend money. It is not in their interests to not do that. Criticism can be directed at some of their policies and their blanket decrees about some sectors, and even individual lending decisions but even where wrongly applied, behind it all is a grain of sense.
Leaving all that to one side there are some fundamental principles to business that a Bank will look for and if some of them are in doubt, are not proved, or are simply missing the bank will take a negative view of a proposition.  A side aspect is that it is not their remit to spend hours of time muscling something into a bankable shape, though sometimes they will. 
How much better all round then when they get a proposition that is properly put together with all the ticks in order and the questions answered before they are asked? Bob Shepherd Associates has long experience in taking a proposition and turning a bankable purse out of a sow’s ear, to use an old expression. Some of the principles that may come into play with varying degrees of importance are:
Basic Business Information
It is easy to fall into a trap of assuming your bank  knows all about your business – it doesn’t. Probably they have the last 6 months of figures passing through the main account and not a lot else. You know your business well and it needs explaining in a well set out business plan that starts with who you are and where you have been.
Out of Date Company Financial Information (or none at all!)
If your Accountant has been slow in doing your Accounts they will be ‘historic’ which is a euphemism for being useless.  All they will show is a record of past performance which does have some relevance but in a limited way.  You need some up to date figures to confirm where your business  is currently and they need to follow on from the last Accountant’s figures.  Whatever the case the lack of up to date figures shows that you haven’t valued the information and have no idea how your business is doing. That is poor management and not encouraging.
Your Business Model
This is a term used to describe how your business idea hangs together. You want that to be compelling and convincing – see that business plan and make sure it is set out consistently, logically and with a full story evident. Don’t assume the bank understands it just because you do.  Look for the risks and make sure you have demonstrated answers. In short does it all make sense and are you actually in charge of it?
It is possible that the Bank will just not have belief in your business because it has specialist aspects. The Bank is after all only so good as the people who are in it (as your business is in fact...) and you have to realise that your cogent and articulate verbal presentation may not make it up the line with the same authority unless you have spelled it out well in that business plan.
Poor Credit History
Surely this self explanatory? If the bank has been slinging cheques back on you it can be no surprise that they are not happy to advance you further funds for that bright idea you have just had. If there is some evidence of poor financial behaviour you need to tackle this head on and explain convincingly that you are past the difficulties and it is not your normal attitude.
Financial Contribution
The Bank will want to see you putting in substantial funds yourself. That will imply you have a vested interest in the progress of the business and adds to the credibility of the whole thing. For small loans do not expect the Bank to put up more than 50%. For larger loans there is a limit to what an individual can be expected to put up and increasing weight is given to your contribution in an unwritten sense of proportion.  The package is made up of cash, and assets some of which may be available for security.
Bank Security
For any substantial lending the bank will look for collateral security. It is a safety net and you will never get a proposition through just because there is security. You may have it refused if there is no security available. What forms acceptable security is the subject of another article.  
You and the Management
The Bank is not lending to the business so much as to you and your team.  No Bank official is going to sit with you day by day and direct you. Once the lending is agreed only occasional checks are made that all is well. You have the trust of the bank. If you and or your fellow Directors do not demonstrate a record of successful management expertise you can’t expect the bank to be encouraged.
In short it is up to you to make your case. It is up to the bank to check what you say, interpret the risks and come to a conclusion about your chances of succeeding with the business proposition.
It starts with you – your standing, your financial worth, you history and track record, and you association with the bank.  That comes before any real examination of the business on the basis that if you are known to know what you are talking about the likelihood of you getting this one right has more credibility. 
The proposition has to make sense, be in proportion, be lawful and respectable, have realistic ambition and a forecasted future that continues to make sense.  Proof of all this is looked for so far as can be ascertained.
Consider this - if a stranger came up to you in the street and asked to borrow a substantial amount, what would you wish to know? 

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