Posted by NathanK on Sep 4th, 2008

Rather than cover some of the “to dos” in banking I thought I’d share a few of the “Not to dos”, as there are some not so obvious pitfalls that many businesses fall foul of when applying for credit.

1) Don’t let the bank guess anything
Too often business either opts not to tell the whole story or takes for granted that the bank will know parts of the story. But beware, if left to their own devises, banks will always err on the side of conservatism, and will assume the worst. If you have related entities in your balance sheet, a bank will assume they are there to actively hide funds from creditors. If you have growing inventory, the bank will assume that the market has dried up and your stock is worthless. If you have disproportionate growth in Cost of Goods Sold, the bank will assume your trade creditors don’t like you and are increasing trade terms. The lesson: Always proactively deal with the negatives in your application and if you don’t know what they are, ask an expert.

2) Don’t falsify information
Pretty obvious, but regularly ignored. Banks have long memories (there’s always someone in the credit department who remembers something that happened years ago), and access to information. Invariably they will find out either before, during or after an application is approved and they will never react favourably once false information is outed (perhaps this is the obvious bit).

3) Don’t leave it to the bank to work out your money flows
If you have intra group funds flowing, you need to give comfort to the lender that other group members will not bleed the borrowing entity dry of cash and solvency. Proactively dealing with this involves disclosing who the entities are, what they do, and where possible, what their financial circumstance is. Proactively dealing with this will reduce time and complication of the lending process.

4) Don’t present a forecast P & L without a forecast Balance Sheet
Bank analysis tools do not operate properly without a balance sheet. Also, without a balance sheet you are only telling part of the story and you are not demonstrating that you are on top of the financial mechanics of your business. Accountants should be able to assist with construction of forecasts that incorporate these if need be.

5) Don’t leave it to the bank to identify their ideal security structure
Banks are not Equity providers, and expect significantly less risk in their “investment”. In return for this reduced risk they obviously expect a lesser return. The more risk the bank can mitigate through security (ie directors guarantees, homes, business property, related party assets etc), the greater the risk:return ratio and, at a portfolio level, the more money they make for their shareholders. So, given half a chance they will take all they can, and more often than not they do. However understanding this premise, it is possible to reduce the security provided, as long as you can present an otherwise reduced risk proposition. This may include demonstrating strong servicing capacity. It may require providing some property but not all. The key is to present the security structure to the bank, thereby setting the expectation levels and providing you a point from which to negotiate.

Editor’s note:

This article is written by Nathan Keating, General Manager of Pearl Financial Services. Pearl Finance are a firm of Commercial Finance Advisors, all of whom are experienced commercial bankers, with actual bank assessment tools, that can advise businesses on how to improve their relationship with banks.  Nathan contributes regularly to The Australian Banker Blog