Last week, we looked at some ways of generating cash internally for your business before approaching a bank. We also looked at what constitutes a bankable proposal. This week, we’ll zero in on what sort of information banks will be looking for and how to approach the information gathering and dissemination stage.
Information
Here, the question is how much information should a company provide to a bank to support its loan request? In practice, the amount of information required is often directly related to the size of loan. If a company is looking to raise a significant amount of money, then it should be prepared to provide as much information as possible. Companies are sometimes wary of providing too much information to their bankers – understandably so. However, if banks are to accurately assess the need for finance and the associated risks, then they will need as much information as possible to facilitate the process. A simple solution to this problem is for bank clients to enter into confidentiality agreements (also referred to as ‘non-disclosure agreements’) with their banks. Confidentiality agreements can be used to guard against the possible disclosure of sensitive information.
What Sort of Information is Required?
Banks will supply a standard list of requirements to support a loan application upon request. However, knowledge of the type of information required beforehand can help to improve an applicant’s chances of success and generally simplify the entire process.
•Audited financials: These should not be more than 12 months old from the date of making the request. While using one of the top four globally affiliated auditors might be more expensive, banks will be more comfortable dealing with a company of this stature. If this is not possible, then a locally recognised auditor should be used. Any financial outlay in this area will be rewarded, especially in terms of the company’s capital-raising efforts.
•Management accounts: This presents a more recent view of a company’s operations, so the management accounts presented should ideally not be more than six months old. Banks may discount this document, but it helps to link the audited accounts, and gives a sense of an organisation’s recent activities.
•Projections: This would most likely be mandatory, especially for companies looking for term funding. While projections cannot be guaranteed to be accurate, a company should be able to defend them and provide updates for any variations. Projections afford companies an opportunity to show a good understanding of their business and industry sector, particularly if they provide various scenarios – a base case (normal) and a stressed case (worst case).
•Business plan: This should tie in with a company’s projections as it is a forward-looking document. It should detail in clear terms where the firm intends to be at different intervals – at least for the life of the tenor of the facility requested, and possibly beyond. It should address and answer the following questions:
•What is the long-term vision of the company?
•What is the current market size of the relevant industry sector, and what is the company’s current market share?
•How does the company get to its intended market share?
•What are the current trends in the industry?
•What is the company’s marketing strategy?
•What makes the company unique from other industry players?
•What is the company’s business model, and how is this appropriate to the overall strategy?
•What are the current risks associated with operating in the industry?
•Based on the above, what are the funding requirements needed to support the company’s growth strategy?
Banks look very closely at the depth and breadth of a company’s management team. Companies need to ensure that there is wide industry experience among key staff, and that this is communicated to the bank. If the management team lacks experience, experienced hands can be enlisted to serve on the board.
•Details of facilities with other banks: Companies need to ensure that they conduct their relationships with other lenders in a professional manner, and that all previous debts have been cleared when applying for a loan. While there is a level of confidentiality required in the customer-banker relationship, details of defaults or previous due obligations with other lenders could be accessed through shared resources, and discovery of undisclosed debts will not augur well for a company’s current request.
Single Point of Contact
After provision of the required preliminary information, there will most likely be questions and clarifications on the part of the bank. It is advisable to provide a single point of contact to handle these queries. Ideally, this should be a senior member of the management team or someone who is deeply familiar with the plans, strategy and financial numbers of the company. While it might not always be feasible to have a single contact, there should be certain individuals detailed by the firm to respond to queries from the bank, and their responses need to be consistent with each other and with previously supplied information. All too often, conflicting details are provided by individuals within a borrowing company, which has a detrimental effect on an application.
Loan Structuring and Negotiation
Once the bank has gone through all the information provided and is satisfied with the responses to its further enquiries, it will negotiate the terms and structure of the intended facility and then make an offer. Any company that has taken the time to streamline its business practices, maximise access to internal liquidity through trade credit and has accurately determined its overall fiscal needs will be in a strong position at this stage.
The bank has the right to vary an initial proposal in line with its credit appetite and underwriting standards, and it is crucial that companies ensure that any offer, if different from the initial request, will not stretch its repayment capability unnecessarily. If it is thought that the offer is beyond its repayment capability, the company needs to renegotiate with the bank. The two parties should be able to reach an agreement that is favourable to both. Items that can be varied are determined by the structure of the facility. These include, but are not limited to:
•Interest period: Borrowers can negotiate to pay interest quarterly or every six months, if monthly repayment is not in line with their cash flow or business objectives.
•Repayment structure: Again, looking at future cash flow, borrowers can vary repayment of principal as a bullet repayment (payable at the end of tenor), or payable at regular intervals.
•Financial and non-financial covenants: Banks will usually provide a list of obligations with which borrowers must comply during the life of the facility. Borrowers must ensure that they can comply with the bank’s covenants or negotiate the terms accordingly.
•Minimum turnover: This is usually for working-capital-related loans. Borrowers should gauge their ability to meet these minimum turnover requirements with the bank.
Other Important Points to Note
Banks usually have a validity period within which they expect borrowers to accept their offer, after which the offer will lapse. Borrowers must use the facilities for the stated purpose. It is essential for borrowers to keep the lines of communication open with their banking service provider, informing them promptly of any significant business developments, such as late instalments, business expansion, new shareholders, or mergers and acquisitions. Timely repayment of a loan increases a company’s creditworthiness and opens the door for further borrowing by giving bankers more confidence to extend further credit to other prospects.
OgucheAgudah is an associate of both the Chartered institute of bankers and stockbrokers Nigeria. He currently works as a special assistant to Nigeria’s minister of Industry, trade and investment with a focus on improving the access of Nigerian businesses to finance.
He can be reached on [email protected]
Oguche Agudah
