A Borrowers Guide to the Universe of Lending

For agribusiness or commercial borrowers, there tends to be an inherent sense of perceived stability in the underlying funding arrangements within the business.  “Today is no different than yesterday, and everything was fine yesterday”.

The borrower’s annual review process (or covenant monitoring) actually sets the benchmark as to the bankability of these funding arrangements.  Changeable fine print imbedded in documentation allows financiers to alter the rules of engagement within the Letter of Offer at any given time. The borrower does not have this luxury.

With the financier continually measuring financial benchmarks, the borrower could be reallocated a new risk profile in either a positive or adverse manner.  If it is in a positive manner, the borrower could be entitled to better pricing or terms.  Does the financier pass this on to the borrower?  On the flipside, the borrower could be taking one more step closer to the cliff face.  Once again, does the financier communicate this with absolute clarity?

Don’t let the financial obligations bog you down in your business!

The Australian banking system has built itself around being compliant.  Compliance is driven from the strict regulations that each bank must adhere to in accordance to the parameters of their banking license.  The exposure each bank has to each industry at any given time plays a critical path to their policy appetite.  As much as a bank assesses a borrower on their bankability, a borrower also needs to ascertain (to the best of their ability) a bank’s exposure and appetite for a particular industry or enterprise.  A borrower maybe constrained to access additional capital with their financier, not because of the borrower’s credit performance, but because of the bank’s exposure to that particular industry code.

The banks do not indulge in playing along the risk / reward curve.  Borrowers must fit inside the policy parameters or they quickly become non-compliant to acceptable lending standards.  What makes it more opaque is that bankers very rarely communicate well with their borrowers as to where they exactly sit on the risk curve with their bank.  More often than not, professional courtesy is confused with bank support.

Hence, this is an important time for all businesses.  More so if a business is operating on the edge of acceptable policy standards of the bank.  There is finite window to “test the market” with other financiers to ascertain willingness and commitment to your business beyond what a current bank can provide.  If the incumbent bank should choose a course of action that is more adverse than what is desirable, this window will close as other financiers tend to retract from borrowers when they are going through a work out position with existing lenders.

For many borrowers, trading conditions have improved remarkably over the years.  How has this been passed onto the borrower in better terms or pricing?  Or have the banks just been with holding the extra profit margins for themselves (achieved via procuring a lower capital allocation assigned to the borrower).

Robinson Sewell Partners can draw upon deep experience to foresee and measure these forces at play, and similarly, extract funding solutions to provide a more stable or a more cost efficient financial foundation so that borrowers can then focus on their business: not the funding.

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