Insights


30 January 2013

Rob Kirkpatrick

Client Director

The decorations are down, the Christmas tree is packed away, holidays are over and it’s back to business.

How will you approach 2013? Will you achieve your business goals this year? Have you made adequate preparations to achieve these goals?

The most common complaint that I hear nowadays is business owners saying they can’t get funding.

With international markets still uneasy and some sectors of the local economy operating at multiple speeds, lenders remain cautious and seek only “quality” deals.

In fact figures just released from the Australian Bureau of Statistics show that to November 2012, volumes for commercial finance have dropped by 8.7% year on year where other finance categories grew¹.

financereadyblog

In a previous blog I discussed debtor finance as an alternative funding option to help growing businesses. But this may not suit everyone and if so, with such cautious lenders, how can a business get access to capital to expand and take advantage of new opportunities?

What will give a credit team sufficient confidence to lend to your business?

The “Five Cs of Credit”

The “Five Cs of Credit” is a method used by lenders to assess borrowers’ credit worthiness.

Essentially it covers all possible risk areas that need to be considered in any credit application. They are:

Character – integrity, reputation and account behaviour
Capacity
– sufficient cash flow to service the debt obligations
Capital
– net worth of the individuals, equity invested and strength of the balance sheet
Collateral
– assets to secure the debt such as property, stock, equipment and debtors
Conditions
– the business itself, the sector it operates in and the overall economy.

Preparing your finance application

Plan well in advance and ensure that you address all possible areas of concern in a logical and easy to understand manner. Spend time researching these because you are expected to know your business and your market well.

For example property markets have been hit hard since the GFC and in some cases property values have dropped significantly. For some businesses this can cause a drop in security value that could hamper expansion plans.

As a result lenders are increasingly placing more emphasis on cash flow type lending and not just relying on property security. Even with adequate security, banks can be reluctant to lend if they do not understand the company’s ability to service debt and repay principal within the life of the loan.

A well-prepared submission that encompasses a business case with robust cash flow forecasts and easy to understand and tested assumptions, will go a long way to getting the approval you seek.

Credit policies and risk appetites are being updated regularly, so it’s worth engaging with your relationship manager. Tell them your plans. Find out how the lender views your market sector. Spend some time finding out what they seek in terms of security; get an idea of any debt serviceability ratios and what the terms of the loan are. Then build those into your models and stress test the scenarios with worst case options.

A good test is to ask yourself if you would lend your own money to the business based on the information you have provided. That way you won’t waste valuable time sending an inadequate request.

Senior management capability is a key issue for lenders and a well-prepared finance application will go a long way to addressing this.

A well-prepared document can also give you the opportunity to open discussions with other lenders, if you find that your own financier can’t meet your needs.

In recent months Vantage Performance is increasingly being asked by clients to help them get capital ready by providing robust financial forecasts and strategic plans.

Does your business have the right people with the right skills to take you to the next level?

Banks like customers who are aware of their own limitations and engage external expertise when necessary. If you feel you may not produce an adequate finance application it certainly pays to engage specialist advice.

Rob Kirkpatrick is a Client Director at Vantage Performance – an award winning, national business transformation and turnaround firm with proven success in solving complex financial, operational and people performance issues.


¹Sources: Australian Bureau of Statistics, 16 January 2013, viewed 23 January 2013 http://www.abs.gov.au/ausstats/abs@.nsf/mf/5671.0?OpenDocument.
Macro Business, 16 January 2013, Lending finance shows business credit downturn, viewed 23 January 2013, http://www.macrobusiness.com.au/2013/01/lending-finance-shows-business-credit-downtrend/.



Rob Kirkpatrick

Client Director

I help clients seek alternative funding options where mainstream lenders cannot assist.

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