Confessions Of A Bank Manager ...

From the banks point of view because they're lending other peoples money and accountable to investors they want to make sure any business loans they approve can be repaid and are given to people who know what they're doing with their business. They also want to be able to check out credit references. After your loan is approved they like to be kept informed about any changes in your business that might affect your ability to repay.

Jamelle Wells and Rosemary Ann Ogilvie quizzed some bank managers who deal with loan applications from SMEs on a regular basis about what they look for in business loan applications. Heres what they have to say

COMMONWEALTH BANK:
"At the end of the day, what we are looking for is the ability of the borrower to service and repay the debt," says Hugh Harley, General Manager, Business Customers. "Cash flow is critical - that's the make or break." Harley details the four major factors he looks for when assessing a loan for business finance:

Does the business have a clear strategy?
Do they have a clear plan to service and repay the debt from cash flow?
Do they have good control over their cash flow, for instance managing debtors?
How are they committed to making this work? What's their track record?

"The complexity with which we explore these issues obviously increases proportionately to the amount of the loan."

"In simple terms, the applicant must be able to demonstrate that they have a plan, that they manage their financials carefully, and that they can control their cash flows. Obviously, to do this they need to have a reasonable sort of accounting system in place."

Harley says the bank needs to be confident the applicant understands the business they are in and that they are proficient in their business. "Often people can take the view that it's the banks that aren't doing the right thing by business, whereas the real issue is: does the business have the ability to repay the loan".

The CBA, like most other banks interviewed has no formal minimum loan. (The NAB has no minimum on overdrafts, but $10,000 is the minimum for a business loan.)

"What we do have are some products that are much better suited to a smaller borrower's requirements. Our Business Card is the perfect example: it's our benchmark product for businesses with a relatively modest borrowing requirement that allows them to manage their borrowing and payments through one simple vehicle."

According to Harley the bank imposes a different interest rate for business cards than for personal cards. There is a very clearly delineated rate structure between business cards secured by residential security, commercial property or cash flow. At 6.95 percent for the residentially secured rate, it's some of the lowest all-up cost of finance available for an overdraft facility.

Harley says the issue of startups is one the trickiest for bank managers to tackle.

"When new businesses come looking for debt, what they really need is equity - and we are not in the business of providing equity. The cornerstone of every business is equity: the owner's stake in the business. Without equity, businesses cannot survive. The issue of equity is an important element: we are a debt provider, not an equity provider."

However the Commonwealth has recently formed a strategic alliance with the Australian Stock Exchange, an internet-based service called Enterprise Market that connects companies looking for equity with people who have equity that they want to put into business.

Once the loan is written, keep the bank informed of any changes in your business. The sooner the bank knows about changes and that you are approaching it pro-actively with those changes, the sooner it can make changes to accommodate your altered circumstances.

ANZ:
ANZ's Gideon Perrott, Head of Lending Strategy for Small Business, says that his bank has a division that specifically looks after small business lending.

"The single most important thing we look for in a loan applicant is a business plan - preferably one that wasn't prepared specifically for us, but rather prepared for the business owner and used as part of their management strategy."

Perrott says the bank also wants to see information that supports the plan and adds veracity to the assumptions it makes.

"However, we are lending money for the future, not looking backwards, so we are interested in projected cash flows and projected budgets. We want to see that the applicant has spent the time going through the sums themselves, and satisfied themselves that this is a good thing for them to be doing."

In business plans the ANZ looks for information that gives it an idea of the background and skills of the key people involved in the business. It likes to know why they believe the loan is required and what other options they've looked at to meet that need. Things like reducing costs to improve efficiency, reducing stock levels, tougher debtor terms, or even capital injection from those involved in the business, or from outside sources.

Perrott says before the bank will give a business money it needs to be satisfied the owner recognises and has taken into account, the risks of borrowing the money.

"We like to know the business owner has sought advice from an accountant before coming to us. Unlike an accountant we can't advise potential borrowers, we can offer them options. We actively encourage the accountant to come along to the interview."

The ANZ tries to avoid businesses coming to it almost as a last resort - 'I need more money to keep my business going'. The bank likes to know how much the owner is going to contribute, including the type and amount of security it intends to offer. All these things built into a business loan, hopefully supported by some independent advice from an accountant, should make the whole process significantly smoother.

"Once we've looked at a deal, if it's obvious from the outset that the application represents something that is never going to work, no matter how much collateral they have, we'll turn it down" says Perrott.

Give yourself time to work with the bank, structuring a deal that suits both parties. It suits nobody to be confronted with unreasonable time frames in which to make decisions.

WESTPAC:
Grahame Marshall, National Manager of Small Business, says Westpac fully recognises the value of SME's to the economy and as such is strongly committed to that market.

"We focus on providing total financial solutions to our business customers. We recognise that lending is often a core part of their business needs, so we provide an extensive range of product solutions for lending. But also - more importantly - we provide advice in that area."

Marshall says Westpac likes to sit down with the customer and fully research the needs of the business so it can give some advice on whether the borrowing option you're after when you walk through the door actually suits your needs.

"There are a whole range of factors that we take into account when we assess loan applicants generally, and businesses in particular. Always the prime driver is the capacity to repay the loan, so we look very closely at cash flow forecasts." says Marshall.

According to Marshall the industry outlook is also taken into account. "While we're equipped to have insight into most of the major industries and sectors, particularly in small business, if the business owner has done some of that research, it gives the bank manager a greater degree of comfort. We can then talk to the customer about how realistic their outlooks and forecasts are."

Marshall says rejection of a loan predominantly revolves around inability to repay it. Other reasons why it might be rejected include lack of collateral if cash flow is not at a satisfactory level. A poor credit track record is also taken into account.

"We may be in the position to advise the customer that it is not in their best interests to borrow the money - from us or from anyone else. But we'd never discourage anybody from coming in and having those discussions with us because setting up a business involves far more than just borrowing and I believe we can add a lot of expertise and advice." says Marshall. Marshall says he always likes to see some type of business plan or financials that have been prepared by an accountant.

"If the accountant can come along to the interview - that's perfect. In most instances the accountant has worked closely with the business operator in setting up the plan and doing the financials, so it's much easier to work through the process. Getting the information upfront is preferable: you can get some more logic into how the figures have been arrived at, as opposed to the black and white figures on the statements. It also saves chasing information down the track."

Talk to the bank as early as possible when you are considering borrowing money rather than putting a lot of time and effort into it without the expertise and advice that it could offer initially.

NATIONAL AUSTRALIA BANK
The key areas the National Australia Bank looks at when assessing business loan applications include the business owners business management skills, character and experience. The bank also looks at financal records, cash flow, balance sheet structure, profit and income reporting.

"The National is very supportive of SMEs and a major lender to this market. Overall, we're looking for businesses to demonstrate they have a sound business plan and can service their loan" says Media Relations Manager Majella Allen.

The NAB likes customers to provide a history of the business, a brief resume of key personnel and a summary of past and present activities. Other information its after includes an overview of the industry and marketplace in which the business operates. This should detail main customers, suppliers and competitors, plus trends and risks that affect the industry. Loan applicants should outline why the business requires finance, how the transaction will add business value, how much is required to meet that need, and how the loan will be serviced.

An overview of future business objectives and an understanding of key business risks is helpful along with profit and loss statements and balance sheets for the past three years, including explanations for extraordinary events or variations in sales and expenses. Your application should also outline any security offered.

The NAB will apparently reject an application if you can't demonstrate the capacity to service the debt. Other possible reasons for rejection include inadequate information, unacceptable operating risks and inadequate security to support the loan.

"Once the Business Banker has a good understanding of the business, he or she can help work through all the available financing options, as well as provide advice about other financial services, such as online banking, which can save businesses both time and money" says Allen.

SIDEBAR: POST LOAN INVOLVEMENT:
The follow up service on business loans differs with of the top four banks. According to Hugh Harley the Commonwealth has a process of annual review of loan performance.

"The format varies according to the nature of the loan and the nature of the business. In some circumstances it's little more than confirming the business continues to satisfactorily service the loan. At the other extreme, we have a much closer involvement with understanding the progress of the firm".

For the ANZ a uniform condition for on all small businesses is that they provide the bank with annual financial statements. The NAB also does an annual loan review.

Westpac's Grahame Marshall says the bank tries to make the process simple for the customer as well as for the bank.

"If they are paying on time we don't bother too much. The prime trigger for reviewing at the smaller end of the market is defaulting on the loan".

SIDEBAR INTERNET BANKING:
Commonwealth Loan applications are available on their Website. Clients need to download it and fill it out manually, but this process is under review. The address is: http://www.commbank.com.au.

Enterprise Market can be accessed at: http://www.em.asx.com.au. ANZ Loan applications are available through their Website, which contains a huge amount of information on how best to apply: http://www.anz.com.au

Westpac
Westpac has a site that contains a whole range of solutions and advice. The address is: http://www.westpac.com.au

SIDEBAR: PERSONAL RELATIONSHIPS AND OTHER BANKS:
The banks interviewed agreed that personal relationships do count in loan applications. It always helps if the bank knows something about the trading history of the business. The NAB says for SME's, the key to assessment is face-to-face relationship banking.

However each bank welcomes loan applications from SMEs that are not currently customers. None of the banks insist on the entire banking package being moved if the loan application is successful.

As the Commonwealth's Hugh Harley says: "Of course we always prefer to have all the customer's business, and we'll adjust pricing accordingly." This is echoed by the ANZ "We like to pass on the economic value a client represents to us back to them through such things as better rates," says Gideon Perrott.

"It can be far more beneficial for a customer to have all their banking with us as cost advantages are built into some of our package solutions," says Westpacs Grahame Marshall.

SIDEBAR: COLLATERAL:
The most common form of collateral for a secured loan is the family home. "For the majority of small startup business, that's the major asset that they own," explains Westpac's Grahame Marshall.

Other types of security include investment property, commercial property, business assets, cash flow and personal guarantee. In most - but not all - instances, the more security offered, the lower the cost of the loan. The ANZ's Gideon Perrott says: "We look for property security, whether it is residential or commercial. It's our preference for three reasons. One, the ownership is registered. Two, it holds value reasonably well, and it's tradeable. Three, it's secure: it cannot walk away!"

Interest rates are weighted towards the degree of confidence the bank gets from the listed value of an asset. "Cash security, in terms of a charge over a cash deposit, is just as attractive. A debenture over company assets may be equally attractive," adds Perrott.

Westpacs Grahame Marshall says sometimes the bank lends without collateral and this doesn't automatically mean that interest rates will be considerably higher.

"Instances where we wouldn't use security are for small amounts of borrowings, or where the business has a strong cashflow and we can take comfort from the strength and the expected tenure of the business" says Marshall.

The NAB lists acceptable forms of collateral as rural property, debentures, shares and stock units, investment bonds, and a charge over a term deposit.

SIDEBAR: BE PREPARED
A good credit history is important when applying for a business loan. Clear up any outstanding matters.

Have an effective accounting system in place. Banks like to know that their customers can manage their cash flow and are proficient in their business. Review debtor's controls: you need to be able to produce evidence that you have effective systems in place for prompt collection of overdues. Monitor expenses.

SIDEBAR: Enlist Help To Get That Money
As the bank managers we spoke to in this story have mentioned, its an idea to take your accountant with you when you apply for a business loan. Accountant Malcolm Weaver from the Melbourne based Business Development Network which specialises in business plans for SMEs, accompanies many clients to loan interviews. Weaver says the three main things bank look for when assessing business loan applications are integrity, security and ability to repay.

"Most bank loans are still bricks and mortar based, they like to know you have a good credit record and they like you to have a solid understanding of where your business is at and where its going".

"If a business owner has been through the process of developing a thorough business plan they can confidently talk to bank managers about what they have planned for the business. If we go with a client for a loan interview we are able to back them up and provide immediate information about accounting and finances. This saves the client the time of having to go away and find things out or look them up. It also shows the bank manager the business owner has been thorough enough to seek expert advice".

Weaver says its important to remember that banks do credit reference checks so there's not much point in withholding information. "The bottom line is that bank managers are in the business of lending other peoples money. They hate it when you do things such as exceed your overdraft without telling them about it. My advice is always tell them the bad news is coming before it actually happens. The best relationships I've seen are when the business takes the bank on as a business partner."

CASE STUDY -
34 year old Angelica Cayzer successfully obtained a business loan in 1997 to set up her business - Bartercard Sydney South. The businesss is based at Pagewood and employs twelve people.

Cazer says before applying for the loan she sought advice from her family accountant and from a mentor who had previous experience with business loans. She also tracked down a bank manager who had approved loans for similar businesses to hers.

"In the end this saved me a lot of time because I didn't have to spell out what my business was all about. The manager I chose knew about the industry I'm in because he'd already approved loans for similar ventures."

Cazer says she rehearsed with her accountant and her mentor so that when she went in for the interview she was prepared for the questions she was asked Although Cazer had an existing savings account with the bank she obtained her loan from, the bank manager she dealt with was initially sceptical about her age.

"I was relatively young and had never run my own business before. However, I had worked for another Bartercard outlet for two years so I was able to demonstrate a knowledge of the industry I was getting into. I also had a good credit rating."

Cazers initial loan was for $225,000 and she used her parents house as collateral. She says she was able to negotiate on some charges such as a fee for an evaluation of the house.

"The thing that was surprising was all the unexpected fees and charges after the loan was approved."

Cazer says she rarely hears from her bank manager, so she is pro-active in contacting him on a regular basis.

"I'm a bank managers nightmare because I'm always ringing up and questioning things on my statements. I fax them profit and loss sheets every quarter and ring up when things both good and bad are happening with the business." Cazers advice for applying for a business loan is to do plenty of research and sell your business plans to the best of your ability.

"Acknowledge what bank managers do and respect this. They make their decision based on facts and figures and realistic business plans. Don't go to them if you haven't got these."

Do your research
Find a manager that understands your industry
Be pro-active in contacting the bank regularly.
Utilise the knowledge of experts
Give your bank manager tangible facts and figures
Contact your bank manager on a regular basis