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How your bank calculates a business risk

Just like you, banks are in business – and they don’t succeed by making bad deals. When they consider your loan application, they’re calculating the financial risk of entering into an arrangement with you.

Let’s break it down.

What the bank considers
For the bank, financial risk comes down to whether you can repay your commercial loan and the interest in the agreed time.

According to the Australian Bureau of Statistics, as of June 2016, the exit rate across all Australian businesses was 12.3% (percentage of businesses that ceased trading). To protect itself, the bank is looking for evidence that your business won’t fall among these statistics and fail to repay the principal amount.

When assessing financial risk, one of the main factors the bank looks at is you, the business owner. What skills and experience do you have? Do you understand your business and have a clear and realistic plan for developing it? Importantly, they’ll also be looking at your credit history, and any debt you may have.

Banks also consider:

  • Security: The bank will evaluate what you’re offering as security against your loan – this might be a family home or other assets such as stocks and shares.
  • Industry: Lenders view some industries as riskier than others, because of conditions such as competition, profitability and the economic climate. If your industry is seasonal, such as tourism or agriculture, they’ll want to know how you’ll manage repayments in the off season.
  • Cash flow: ASIC reports inadequate cash flow among the top reasons why companies become unable to repay debt. The bank will want to see what revenue you have coming in, and be assured you can pay wages, keep the business ticking and make your loan payments on time – even if something unexpected happens.

Show the bank you’re managing risk
Having higher risk doesn’t mean you won’t get a loan. But you need to show the bank you’re aware of the risks and are taking the necessary steps to manage them.

Start by making a risk management plan that documents your business’s specific (financial and other) risks and identifies the steps needed to reduce or manage them. See business.gov.au for useful tips on risk management and tools to plan for it.

Regularly review and act on your plan. No matter the size of your business, that’s an essential part of good business management.

Next, when preparing your loan application, think about what will convince the bank you’re on top of your business risks. Here are some ways to do just that:

  • Provide all the documentation the bank asks for.
  • Use a business plan to succinctly explain what your goals, objectives and target markets are with any forecasts that might help.
  • Supply solid evidence of your personal experience and credentials.
  • Make sure your financial records and forecasts are in good order (poor financial control and lack of financial records also rate highly among ASIC’s top reasons for company insolvencies).

Convincing the bank that you’re on top of risk management doesn’t involve smoke and mirrors. It’s about understanding your business, having robust practices, planning for the future and demonstrating you’re on top of any present or potential risk.

 

This article provides general information only and may not reflect the publisher’s opinion. None of the authors, the publisher or their employees are liable for any inaccuracies, errors or omissions in the publication or any change to information in the publication. This publication or any part of it may be reproduced only with the publisher’s prior permission. It was prepared without taking into account your objectives, financial situation or needs. Please consult your financial adviser, broker or accountant before acting on information in this publication.

Make it happen

The staff at MAKE Finance Group are experienced and dedicated to providing our clients with exceptional levels of advice and service.

As a full service finance broker, we can save you time and stress as we negotiate with Banks and Financiers on your behalf. Whether it is asset or equipment finance, business finance and advice or even a home loan, we will go to the market on your behalf and find the best possible deal available.

Let us worry about the financials, as we make it happen for you.

Why Partner with Us?

The staff at MAKE Finance Group are experienced and dedicated to providing our clients with exceptional levels of advice and service.

MAKE Finance Group holds sought after commercial lending accreditations and access to a substantial panel of lenders for both Equipment and Business Finance.

As a finance broker MAKE Finance Group saves you time and stress as we negotiate with Banks and Financiers on your behalf. This allows you to keep focused on your business while we do the finance work.

This ensures you receive the best offers with the objective of saving money and increasing profitability.

Testimonials

Here is what a couple of our clients have said about MAKE Finance Group.
  • Geoff at MAKE Finance Group made the process of purchasing an investment property a seamless process. Thanks for your patience Geoff. I would highly recommend Geoff and his team at MAKE for all your finance needs. Cathy, Warrnambool

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