Bank Lending…..Art or Science?

I am often asked by clients whether the process of Lending is an Art or a Science. This question is usually prompted by an unexpected outcome to a borrowing request or a line of questioning by the lender which the client finds puzzling. My answer is that lending money is both an Art and a Science and I will endeavour to explain here what that means for the borrower.

It’s all about the Numbers!

One of the public myths about Banking is that it is just about the numbers. It is certainly true that financial performance and credit metrics are very significant when it comes to the decision to lend money but other factors are important too and have a significant influence on those decisions.

Some business owners will hark back to a ‘Golden Age’ when bankers worked locally and knew all their customers and their businesses intimately. Entrepreneurs will also sometimes express concern that the process for making credit decisions has become more opaque. This does not mean however that factors such as business track record, the business model, competitive position and most importantly the ability of the Management Team are no longer as important as pure Financial Analysis. This Non-Financial Analysis is critical to a sound lending decision and a good credit analyst will give equal weight to both areas when making a judgement.

Finding your Relationship Contact

A Credit Underwriter can only assess the information they have been fed by the client’s direct Relationship Contact. The experience, ability and internal credibility of a business owner’s Relationship Contact is a key factor and I always advise clients to be as discriminating in their choice of financial stakeholders and specifically their direct Relationship Contacts as they would be when choosing their lawyer, accountant or vetting other key suppliers.

However for the average SME it can sometimes be difficult to find and then retain a Relationship Contact with the appropriate skills.

Telling your Story

Lending proposals are rarely completely straightforward. Only a small proportion of deals are so strong that the decision to lend is virtually automatic. Similarly very few cases are so weak that a decline is inevitable. The great majority of borrowing requests fall into the ‘grey area’ where a wide range of information needs to be collated, interpreted and some measure of due diligence completed. It is these cases which test the ability of the Relationship Contact….presenting the client’s case, detailing the strengths of the business and where there are risks (and all lending proposals have risks), identifying robust mitigation and making the arguments for why the lender should back the client.

Having a good Relationship Contact who can help present your business effectively is therefore important but not all SME’s will have this advantage. Even where the decision to lend is positive I have found that the quality of the credit application can still make a significant impact on the level of support and certainly the specific terms offered by the lender. It is important that an experienced eye is cast over the presentation and where the story is incomplete or unconvincing further explanation is provided to reassure the lender and obtain approval.

Conclusion

There are many potential sources of SME finance. However not all owner-managers have the knowledge or more importantly the time to invest in preparing a lending proposal and then navigating the debt markets to secure the required funding on the best possible terms.

It is recommended that the owner-manager consult with their accountant but also perhaps a commercial finance broker to take advantage of their knowledge of specific sectors and the credit appetite of individual lenders. Most importantly they should be able to provide access to an experienced Relationship Contact in the chosen lender who knows your business sector and will manage and nurture your relationship once the deal is underwritten.

This paper represents the personal views of the author but is the product of very many years spent working in Relationship Contact roles and Credit Underwriting. If you require more information or want to discuss or debate any of the points made then please do get in touch.

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Friday, 20 September 2019