29 Apr 5 Quick Clues to your Business Loan Strength
The business has carried commercial debt for decades in various forms. The relationship with the bank has been harmonious for most part in parallel to the highs and lows of trading and business conditions are currently satisfactory.
But how do you know if your bankability is strong in the bank’s eyes without the need to probe too deeply? With the shifting landscape for lending, what litmus tests can you quickly apply to ascertain a crude level of comfort?
Below are our 5 key characteristics that would indicate your commercial lending credit risk rating is strong and is being recognised as such by your lender. These measures are derived from deep generalisations and for greater certainty they should be benchmarked in accordance to your industry and enterprise. But they certainly create a starting point for thought and discussion.
- Loan Maturity
A long loan term offered by the bank provides a demonstration of comfort and for your business it offers a higher level of funding risk mitigation. Loan maturity dates that offer 5 years or longer would suggest predictability in long term viability.
- Interest Only vs Principal & Interest
A bank that is offering longer dated interest only periods (like 5 years) would indicate that the level of debt within the business is not a concern and is supportive of the business reinvesting capital back into the business for growth as opposed to debt reduction. Whereas a principal reducing loan may suggest that the bank would like to see debt being reduced and that a request for further debt may be scrutinized quite heavily.
- Post Funding Covenants
A loan agreement that has vert light post funding covenants (or none other than an annual review) is a good indication that your business in operating well within the comfort zone of the bank. On the other end of the spectrum, heavy or high touch continual financial reporting may reveal that your business is borrowing near capacity and may warrant additional rigour and discipline to ensure these covenants are not breached.
- Interest Rates
For commercial lending, an all-up interest rate of 3.75% – 4.25% (including line fees, customer margins etc) in today’s environment would indicate a strong business that is receiving competitive rates. Please note that your business may be strong, but it has not been translated in competitive pricing by your lender. More corporatized businesses may be paying a lower range. Hence, higher rates could mean two things. The first has already been noted. The second could be a risk rating which is more marginal. Both scenarios would warrant further investigation.
- The Corporate Box Paradox
There is a strong correlation between how much profit a lender earns from a client to the amount of special invitations to sporting events, dinner, lunches, theatre or conferences the client is invited too. If your business is quite substantial and the invitations are not forthcoming, take this as a possible compliment that your customer margins are trim and cost efficient. And draw comfort that these invitations are being spared to those clients who are paying to much for their services. Once again, there are outliers to this analogy, but one worthy of thought.
Drop a line to me anytime to discuss lending in general or to comb through a scenario. Our banking data and market intelligence is deep, and we are willing to share this knowledge with anyone demonstrating a high level of curiosity.