Financing - What Banks need from Business

We recently interviewed Michael Cearns, Managing Partner - Business Development at National Australia Bank.  We asked him about what they are looking for when approving finance and how this has changed over recent times.

BusinessNAV:  What are Business’s doing wrong in their finance applications?

Cearns: “Business owners are relying on three years of historical financials thinking they’ll be an indicator of future performance in the eyes of the bank.  Businesses who are not ‘close’ with their banker are getting caught expecting that sort of information will ‘fly’ in a pitch for new lending.”

BusinessNAV:  What do business owners need to focus on in their applications?

Cearns:  “Cashflow projections and forward budgets.  Two-to-three years out preferably.

80% of would-be borrowers still send historicals ‘only’.  We wouldn’t send them back, but we would ask for the forward projections to support past performance continuing in the future.  We are looking for a deeper understanding from the business owner of their business and we are looking for them to be realistic about their forecasts.

We assess the assumptions they have made in producing their forward projections. 
We want the numbers ‘sensitised’ - give the best case - then show us what happens if, say, revenue drops by 15%.

We want to know the communication mechanism or trigger the business has in relation to any changes that could affect their ability to meet loan conditions.  The client needs to be proactive and comfortable to raise any issues with the business performance with their banker.

There is a cost to the bank if it has to do this work.  And ultimately unprepared applicants bear that cost.”

BusinessNAV:  What does the NAB focus on when assessing a business’s application?

Cearns:  “We focus on the businesses primary source of income, or cashflow, to repay the loan, and less from the secondary source, which is sale of assets.

In the past a well-secured loan against real estate assets gave the bank comfort of repayment should historical performance not be repeated. We need to have certainty the primary source of repayment is realistic in this economic environment.

Cash flow is the focus.  We like to see a debt serviceability of at least 1.5 times on a sensitised basis.  That is, if income drops by 15% and interest rates increase - are you still able to service and ultimately repay the debt?

Good businesses have, and continue to mitigate risk.

Risk comes down to the complexity of a transaction, and may be detailed to the extent of whether there is a buy-sell agreement between business partners, or as simple as movement in interest rates.

I ask the question, “What risk’s do I need to mitigate, which left unchecked would result in the “death” of my clients business?” - things like:
•    Death or permanent injury or illness of owner/s
•    Increase in interest rates to 10%
•    A customer leaving, who makes up 75% of revenues”

BusinessNAV:  So how has the banking landscape changed in recent times?

Cearns:  “Bankers and (sic) customers need a deeper understanding of the business in question.  All facets of the business.  A bank buzz word is ‘genuine contact’.  An open and honest conversation between the bank and the client. 

To this end, NAB is ‘open for business’ in this market.  We are keen for clients to acquire where it makes strategic sense.”