WHAT DO LENDERS REQUIRE BEFORE DECIDING TO LEND?

The hospitality sector has taken a proverbial battering on all front in recent times, virtually all from factors outwith its control. And consequently hospitality businesses are frequently seen as “too high” risk by lenders and so are struggling to access finance.

Even in these challenging times though, the increase in diversity of lending does create opportunities to borrow which might otherwise not have been here. As well as the traditional high street bank lenders there are a range of others: bridging providers, alternative lenders like peer to peer and online lenders and commercial/ specialist lenders such as asset and debt financiers.

Each of those lenders shall have their own requirements and it is important to match-up with a lender appropriate to your business. But the bottom line is that there are lenders out there who are prepared to lend.

So the question then becomes how do you convince a lender to give you a loan for your business needs?

Purpose Of The Loan

First, give the lender a business plan. Show them that your business is solid and you have a strong track record of performance. Demonstrate to the lender what you could do with the borrowing. Be specific about how much money you need, what you will do with it and how you will pay it back.

After the lender understands your business, the purpose of the loan and the method of repayment, it will evaluate the lender’s risks by using the five Cs: Character

Collateral

• Capacity

• Capital Conditions.

The Importance Of Character

Craig Darling Head of Banking cdarling@gilsongray.co.uk

Foremost on the list is character. If a lender doesn’t trust you or your business, they will not approve your loan request. It doesn’t matter how much collateral you have, it will not be enough to offset a lack of trust. The lender needs the confidence that the borrower has the experience, education and industry knowledge to successfully manage the business, especially in challenging times. The borrower’s reputation plays a significant part in getting a lender loan. Your credit history will show your track record for repaying debts.

The Need For Collateral

When a lender makes a loan, it determines a plan of how the borrower will repay the loan. If the borrower defaults on the loan, then the lender falls back on the collateral. A lender never wants to use the collateral to repay a loan, because the sale of the collateral may not be enough to pay off the loan.

Lenders like to take property and assets as collateral as a way to recover their loan in the event the borrower fails to pay as planned. However, another of the main lender advantages to taking collateral is that it helps focus the borrower on business and financial performance so to avoid business failure and nonservicing of loans.

Capacity To Repay The Loan

The borrower must show that it can repay the loan out of the company’s cash flow. The lender will analyse a company’s debt-to-income ratio and the amount of its free cash flow. Lenders like these ratios to provide a cushion in case the business takes a downturn.

The Need For Capital

Lenders feel more comfortable when the owner has their own money invested in the business. Lenders like to know the owner has “skin in the game” if the business fails. If the owner is not investing in their own business, why should the lender? When owners have more personal capital in the business, they will fight harder and sacrifice more to save a business and repay their debts.

Overall Economic Conditions

Besides analysing the borrower, lenders will look at the overall economy, industry trends and even the direction of politics. They are thinking about factors beyond the control of the business owner that will affect the performance of the company.

The current economic climate is a tough environment for would-be borrowers to obtain funding. However there are lenders out there who want to and are prepared to lend. Understanding who is out there, their requirements and the process that lenders go through to evaluate their risks is essential to maximise your opportunity of making a successful loan application.

For more information on leases please contact Craig Darling on CDarling@gilsongray.co.uk