Information Required by the bank.
Posted: Thursday, January 21, 2010
by Steve Jones
SLJ Commercial Finance
There has been much press comment about the availability or otherwise of credit (in the UK) over the last few weeks although I have to say that my experience has been a muted demand, rather than a reluctance of the banks to lend. Nevertheless, there has also been comment from both the FSB and the CBI that businesses have encountered difficulties in merely renewing existing borrowing facilities.
When looking to renew a borrowing facility certain pieces of financial information will generally be required by the bank not all will apply in every case and some will have more significance than others, but it makes sound business sense to have as much available as possible. Clearly the information needs to be both accurate and up to date if information is not available the bank could easily believe that there is something to hide, even if there isn't!
1. Cash Flow Forecast
It is important to be able to assess the working capital requirement for the business to ensure that sufficient cash is or will be available to meet the day to day operation of the business. So detailing when income is expected and when bills are to be paid is very important. By producing such a forecast and then monitoring it will also enable corrective action to be taken early if variances occur. The bank may also need some evidence to support the forecast to demonstrate how the figures were arrived at. Be prepared for the bank to fully assess the forecast and thus answer any questions they may have. These are likely to be, what if' type questions. Such as; What if,
Sales are less than expected;
Debtors pay later than expected;
Bad debts are incurred;
Interest rate rises;
Costs/overheads increase.
2. Aged Debtor and Creditor Lists
Naturally it is important to keep a check on both how much the business owes and it is owed and a usual way of doing so is by producing a fully itemised list for both debtors and creditors. The analysis usually also includes a time frame for when payment is due, i.e. 30, 60, 90 + days. Consideration should be given to the risks involved, for example the loss of a major customer/client for whatever reason (e.g. insolvency, to a competitor etc), or perhaps over-exposure to a single customer. The bank will want to fully understand the business and thus will have a number of questions, such as the following;
Are debtor and creditor settlement terms agreed in writing?
Are there any trends of late or non payment?
Are agreed terms of trade being complied with? (Debtors outside of terms?)
Are previous months figures comparable to current figures?
What is the explanation for any changes in trends?
Is there any quality assurance of products or service, from suppliers?
What credit checks have been undertaken both for suppliers and customers?
Is there an agreed dispute resolution process in place?
Is bad debt insurance in place?
3. Management Accounts
Funding decisions are often based on management information as well as historic trading figures. Up to date information is therefore important and is used to assess how a business is performing. The bank will compare current performance with historic figures and previous projections. Supporting information may also be requested such as copies of VAT Returns. Items such as depreciation, drawings and finance costs should also be included.
4. Historic Trading Accounts
Although it is likely that the bank will already hold historic figures their availability should be ensured as they are used to assess track record and provide relevant trends. 3 years is the usual period required and the bank will be looking at the trends revealed and thus may seek explanations for changes in turnover, overhead costs, gross margins etc. Also if any single figure appears out of line with what would be considered usual or reasonable, then again explanations will be required.
5. Profit & Loss Forecasts
In difficult and changing market conditions a demonstration of future profitability is required and this can be achieved by producing a profit and loss forecast. The bank is looking to understand the future of the business and particularly in terms of the impact variances or changes to income will have on the business overall. Although a forecast covering a 12 month period is usual, in some circumstances and especially where significant growth is anticipated then 24 or even 36 months, may be requested.
6. Balance Sheet
As this is a snap shot of the business showing assets and liabilities it can be used to demonstrate that the business is solvent and also how it [the business] is funded. The bank will undertake some ratio analysis and compare the results to previous results or industry standards. The more common analysis will include the following;
Liquidity Is there sufficient cash available to meet immediate liabilities? How has this situation changed?
Solvency How much of the business is funded by borrowed capital? What is the trend for this ratio and how high is it? Clearly the higher the ration the more vulnerable the business is to changes in interest rates.
Efficiency how quickly payments are made and received (in days), what are the trends, industry norms? How long is stock held before being sold?
Profitability What is the return on capital employed? This could be compared to other forms of investment, such as the Stock Exchange or perhaps an interest bearing deposit account.
As mentioned above, the bank may not require all of the above information and indeed it is probably worth speaking to them before a meeting is arranged to determine exactly what is required. Production of all of the above could well be time consuming and perhaps expensive, so only provide what is requested.
Steve Jones
SLJ Commercial Finance
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