Approved! – The art of working with banks
We still hear from business owners that it is difficult to obtain funding from banks but at the same time, banks tell me that they have got money to lend (and large lending targets).
So where does the problem lie?
It seems obvious to say but Banks lend money on the absolute expectation that they will get it back in an agreed timeframe, and this is especially the case post credit-crunch. Banks are not in the business of chance and possibility. On the basis that no one has a crystal ball, especially when it comes to the small/medium business sector then the role of bank credit underwriters is to assess the probability of a loan being repaid, and in the event of business failure what security is available to ensure the bank still gets its money back.
We know that banks are in business to make money, and bad debts are not good for business or bank managers’ careers!
The reality is that all banks have their own credit policies by which borrowing requests are assessed. These policies will continually evolve in light of external factors such as the economy, legislation and political pressure and internal factors including the bank’s experience of lending to certain sectors, the financial health of the bank itself, bank growth targets etc.
Frontline bank managers, with a few exceptions, have to submit all borrowing requests and renewals of existing debt facilities to a credit underwriter whose job it is to fully assess a business against a set credit policy and either agree or decline the request. In the main, local bank managers have no authority to make lending decisions – the good ones will understand credit policy, nurture relationships with his or her credit underwriters and be able to give you a reliable indication of the likelihood of a borrowing request being successful. The bad ones, well…
Demystifying the “Credit Underwriter”
We have all heard stories of or experienced ourselves, bank managers leading business owners to believe that everything is going well with a borrowing request, only to be told at the last minute that it has been “declined by my credit underwriter” or that “the underwriter has some more questions”. A good bank manager won’t formally present a request for credit approval to his or her underwriter without being very confident that it will be agreed. That is the art of today’s bank manager – understanding the rules of the game.
In my experience, bank credit underwriters are (on the whole) thoroughly nice people with a tough job to do. They have to apply a credit policy to borrowing requests from business owners that they will never meet and make judgement calls where an application falls outside of credit policy. If they decline a deal they are the “bad guys” and conversely if they support a marginal deal that later goes wrong then they may get requested to justify their decision. Why would they take risks with their careers?
Part of this assessment will usually include an automated system rating based on the performance of the bank account and other external “feeds” such as Companies House data, credit reference agency ratings etc. Sometimes a request will be scuppered before it even gets to the underwriter’s desk and it is the computer that really does say no!
A high quality, detailed borrowing request is the key to success.
Good bank managers are seriously busy people – large portfolios of clients, endless returns and reporting to do for senior management. Putting together a detailed borrowing request to submit to credit can be a very demanding, time-consuming process that has to be fitted into the working week.
This series of blog posts will reveal what goes into a typical credit report that a bank manager submits to his or her underwriter.
So to answer my initial question – where does the problem lie?
Banks remain highly selective about which businesses they want to lend to, and that is not going to change anytime soon.
However, we also see a lot of poorly prepared business owners who do not understand the granular level of detailed information they have to provide their bank manager with in order to allow him or her to present the borrowing request properly to credit. This can lead to delays in the credit decision-making process and sometimes mean that requests are unnecessarily declined because the underwriter did not receive all of the relevant facts.
There is a gap.
Hopefully this series of weekly blog posts will demonstrate what goes on behind the scenes when a borrowing request is submitted to your bank and how we can close that gap between businesses wanting to borrow money and banks wanting to lend.