Q. I recently wrote an article on business finance highlighting the three “s”….security, serviceability and suitability. Do these criteria still fit into the lending matrix of Australian banks?
A. They form the framework for any lending submission, but over recent years the advent of new technology, access to better data and more sophisticated analysis systems, have made the assessment of lending applications a much more technical process. Whilst this has some advantages, I am a firm believer that human analysis, the “old gut instinct”, can never be replaced by a computer programme.
Q. Are finance brokers finding it harder in 2010 to get bank finance approval?
A. The banks have definitely toughened their credit criteria. I have often been told by banks that they have not changed credit policies in recent times. They may not have changed policy, but they have definitely changed the interpretation of policy! In essence they are now almost micro managing every file, leaving nothing to chance- jumping at shadows.
Q. What are the reasons?
A. Initially a grave concern about the state of the economy but in recent times it is more about letting us know that they are in charge and are setting the agenda. It could be argued that the Australian banks have been the greatest beneficiaries of the GFC. They have come out of it with record profits and increased market dominance.
Q. Are the banks lending a lower percentage against the total value of the asset? What is a typical example of lending ratios? 60%? 70%?
A. 80% against residential property is standard and has not changed. Many lenders have dropped the gearing against commercial property from 70% to 65%, and some to as low as 60%. Gearing against business has also dropped but the most critical change has been that the banks have shortened the loan terms when funding against business assets (cashflow). What was previously say a 7 year term is now a 3 or 5 year term. This has an enormous impact on the cashflow of the business.
Q. Are business borrowers being asked to pay a disproportionately higher interest rate than corporate borrowers and home buyers?
A. Absolutely! Business borrowers are paying much higher risk margins and fees than they did 2 or 3 years ago. This is largely due to the lack of competition in the business finance market and the desire of the banks to offset the higher cost of funds brought about by them borrowing too much money at too high a margin during the GFC. It is more politically acceptable to penalise business borrowers rather than home borrowers.
Q. Who should prepare the business plan or bank submission? The accountant for the buyer? The finance broker?
A. The client or their accountant should prepare the business plan. The finance broker should extract the relevant information from the business plan to form the basis of the finance submission. Many lenders want to know that the client has a business plan, but don’t necessarily want to sit down and read it! They only want to focus on the areas that relate to the finance application.
Q. Does the bank take interest in the due diligence side of a business sale? Are they interested in the buyer’s accountants DD report?
A. Yes, but often they will only look at the summary and will be looking for any adverse commentary.
Q. We note many finance approval letters are subject to a valuation of a property (either the buyer’s house or the freehold of the business where it is a double deal). So is a finance approval letter really a finance approval?
A. A bank approval letter is really no more than an indication from the bank that they are prepared to provide funding on certain terms and conditions. We have always taken a view that the finance is not unconditional until the bank has handed over the cheque! Technically the bank could withdraw the approval at any time if the conditions are not met or information comes to the attention of the bank, which at its sole discretion, believes is adverse to its position.