The risks of bank generosity
When it comes to commercial borrowing for the SME you will see plenty of statistic bandied around about high approval rates and banks lending to SMEs.
Banks are lending but the criteria remains tight and the statistics don’t tell the whole story.
A major contributor to the SME getting lending declined is banker generosity, let me explain how this happens.
The BBA (British Bankers Association) publish approval statistics on a quarterly basis, these figures are for Q2 2016;
The approval rate showing is between 80-90%, pretty good but not the whole picture. There are no statistics to support the next part so I will explain. Your bank manager assesses your proposal then forwards to their line manager then to their credit team. There is a hierarchy the process follows. Many applications are declined at the bank manager level, declined on criteria before your manager even considers it, or declined at line manage level. Once you get through these layers, then there is an 80-90% chance of approval, or a 10-20% chance of still being declined.
One of the big reasons that commercial applications are declined at credit team level is generosity. Here is why this happens.
The underwriters mind
When an underwriter thinks the lending being proposed is too stretching, too ambittious or too greedy then concerns are raised. What follows is a more detailed look at everything else within the proposal. The more you look for weaknesses the more you will find, after all repayment is always going to come from something happening in the future so a matter of opinion is always involved.
For your bank manager’s generosity read an underwriter’s definition of greedy. They don’t see the bank manage being generous they see the borrower being greedy for borrowing.
Take this example;
- Good client with sound history
- Wants to buy a new business and is seeking £150k finance, the client is putting in £100k of their own cash
- Client offers a charge over their property to support the loan
- The bank manager suggests that the client applies for £250k, being the whole amount because the security being offered is very good
All good right? You can put in less cash, the bank is positive and encouraging? No, it won’t work like that.
The underwriter sees it this way;
- The client has cash and doesn’t want to put it in. They lack confidence in their own business
- If the client lacks confidence then how good are the forecasts?
- How good is the business being purchased?
- Why doesn’t the client want to put their cash in?
- The forecasts could be too ambitious
- Will decline as the deal lacks a stake from the client and doubts exist over the business being purchased
All this comes from the bank manger being too generous in what they think they can provide. The key is that you don’t give the underwriter a reason to dig deeper into the proposal. There is always a risk in lending money therefore there is always a justification to saying no, don’t let that door be opened.
There is only one real way to avoid this scenario.
The best way to avoid this scenario is to use the adage that if it looks too good to be true then it probably is. If your bank manager starts to offer more than you asked then err on the side of caution, or pick up the phone and call me!
Just beware of generosity from your banker.
By Dave Farmer
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