10 Red Flags to Lenders
Banks need to take into account both financial and non-financial factors when assessing any lending proposal. Here we list 10 common non-financial issues that may raise the red flag of concern and reduce your lending application’s success.
1. Poor communication of the deal
Communication is key. If the bank is not convinced that you understand your business, how can it possibly have the confidence to support you? Don’t confuse, be specific and get it right first time. As well as discussing your financial needs (supported by relevant data), ensure you can confidently discuss your market, strategy and competitive edge.
2. Weak industry outlook and external pressures
Whilst lenders continue to support their existing cyclical business clients through peaks and troughs, if the industry outlook is negative and future cash flow uncertain a new bank may not wish to take on this risk just now. Furthermore, growing external pressure from competitors or legislative changes over which you have no control will be taken into account.
3. Inadequate spread of risk
If the future of your business is reliant on one key client, supplier, product or region, the downside risk may be considered too high to the bank. Notwithstanding your current situation, the unexpected does happen and the bank needs to factor this into its risk assessment.
4. Opaque business structure and hidden liabilities
Complexity doesn’t impress – A bank needs to clearly see where debt lies and who controls the assets that support the debt. A complex and unnecessary multi-layer structure comprising subsidiaries, associates, investments or joint ventures may not help your case. The structure should reflect the size and type of your business. Furthermore, if related companies have different year ends a lender cannot be confident that assets have not been double counted.
Out of sight out of mind – Guarantees, contingent obligations and pending litigation may also add to a future debt burden. In certain sectors obligations such as performance bonds are considered a necessity but if you have considerable off-balance sheet liabilities this will lead to investigation.
5. A weak management structure
If your business relies on one key individual, has an unbalanced or inexperienced team, has seen a quick succession of those undertaking major roles or has a less than competent financial controller or director this will ring warning bells for the bank.
6. Poor management decision history
Past errors in judgement will come back to haunt you. Having said that, a successful remedy, with plans swiftly implemented to avoid a recurrence, could be viewed positively by the bank. The strength of your management team will be seen as dictating the strength of your business.
7. Inadequate internal monitoring systems
If internal monitoring systems are poor and financial staff inadequately trained this will not install confidence that the bank’s lend is safe moving forward.
8. Unauthorised operation of the bank account
A poor repayment history, excesses, unpaid items and covenant breaches are clearly not going to help your case but more subtle incidents such as undisclosed issues having previously come to light and excessive man-hours needed to chase requested information will be recalled.
9. Expansion planned beyond your comfort zone
There is nothing wrong with expansion into a new area but if it becomes evident that you have undertaken insufficient research or do not have the necessary skills and resources to carry it through, the bank will have little confidence in your venture.
10. High exposure to country risk
If your business is exposure to a country that is unstable, either politically or economically, this will raise your risk profile. This may be directly in terms of currency exposure or in terms of customers, sources of raw materials or a manufacturing base.
The hard numbers of the deal itself are clearly key in any lender’s decision but it is not all about the numbers. For a successful lending application financial and non-financial considerations will be taken into account by a bank and red flags should be avoided.