Interest rates are low, but if you want to borrow money from a bank, expect to have to jump some hurdles. Banks today have become very cautious especially in lending to small business or start-ups. It will pay to do some homework not the least of which is to prepare a personal financial profile.
With deposit rates at the major four banks in Australia now slipping below 5% for the first time since early 2010, savers and depositors have seen their returns shrink after a series of discounts being applied by the Reserve Bank of Australia. Borrowers however can look forward to saving money on their loans as these lower deposit rates mean the banks pay less for their funds and hence are able to price this into their lending rates. With a lower demand from property buyers a number of banks are now lending money on mortgages at well below 6% which is nearly 2 percent below peak mortgage rates form 2007-08.
But (and there’s always a but!) if you need to borrow money; there’s one bit of advice that you will find invaluable: be prepared!
To illustrate the difficulty some borrowers are having at this time, many small businesses for example. find themselves shut out of traditional bank lending as banks beef up loan requirements. In most cases the financier will require you to have already put up your own capital as an indication of how much you have at risk should the business fail. If you have a significant personal investment in the business you are more likely to do everything in your power to make the business successful.
Financiers come back to what the old bankers call the three Cs, character, capacity and collateral.
Capacity to repay is the most critical of the three factors. The financier will want to see in writing exactly how you intend to repay the loan, whether this be via a series of repayments over a fixed term or as a total loan return after a defined and agreed period. The lender will consider the cash flow from the business and the timing of the repayment. Payment history on existing credit relationships – personal and commercial – may be considered an indicator of future payment performance.
Collateral is an additional form of security you can provide the lender. Classically it is bricks’n mortar – whether this is the family home or another property, the bank wants to know there is a second source of repayment. Additional security can also be satisfied by business assets such as equipment, buildings, accounts receivable and, in some cases, inventory. These are considered possible sources of repayment if they can be sold by the bank for cash.
Character is a much-bandied-about term. You will instinctively know this to be about the quality of your past professional or business relationships (perhaps supported by references) and, more subjectively, about how much (or little) you impress your potential financier in terms of trust and honesty.
Prepared loan applications add a lot of credibility to a loan request. An unprepared loan applicant, on the other hand, immediately places in the banker’s mind a question as to whether this business is worth backing. You need to woo the potential lender with the numbers. Give them hard numbers about your business’ financial performance and give realistic projections about future performance. Make a persuasive case of why your business needs the money and why it makes sense for the bank to lend your business money. Above all give a definite, unassailable plan on repayment. If you’re a personal borrower, you will need to show that you earn regular income and demonstrate that you have always paid you debts back – in full. And take care not to have left a mobile phone or utility bill unpaid for more than 60 days; you might find yourself listed as a defaulter by a credit bureau.