The bank expects the entrepreneur to finance itself for a significant part of the financing needs and therefore take part in the risk. The bank is seldom interested in approving loans for a small business if the entrepreneur or main investor has not put up the credit of their own.
Insufficient Contributions
- On the current bases, one generally speaks of a minimum level of own contribution of the order of 20%, but this is theoretical because specific parameters can imply a need for own contribution more consequential, for example. If a starter project or for specific sectors.
- We can consider two main reasons for this requirement: (i) the more significant the entrepreneur’s contribution, the more the risk of the bank is limited, especially since the bank is by definition reimbursed first, and (ii) the more he entrepreneur is involved in his project, including financially, the more he is stimulated to create value.
- Please note, this does not only concern starter projects! It is indeed also necessary during the development phase of the activity that the company take a more or less substantial share of the risk at its expense. Sometimes a recapitalization is even necessary.
Financial Imbalances
- Specific financial imbalances can appear both in the asset structure of a company and in its profitability structure.
- Considering the impact that the existing and future situation may have on the business’s viability and, therefore, on its ability to repay loans, the bank is careful to analyze with precision the main related indicators. These main indicators relate to solvency, liquidity, working capital, working capital requirement, gross margin, added value, EBIT (DA), etc.
- A manager / associated current account with assets or liabilities will also have an impact.
- These analyzes are carried out based on the situation before and after integrating the new loan (s).
Insufficient Warranty
- As much as the bank analyzes in-depth the probability of default on loan to be granted, it also wishes to cover its risk if a default occurs, via guarantees.
- However, it is quite common for a company not to have elements that can serve as sufficient collateral in the bank’s eyes, especially since the requirements in this area have increased in recent years. In such a case, the bank generally requests private guarantees (real or personal) or refuses the credit.
- There are various solutions to try to make up for this lack or avoid having to excessively link the business’s risk to the private heritage of the entrepreneur, for example, by calling on public solutions and the Investment Fund.
- Also, avoid giving too many guarantees too quickly to a single bank, as you will then be “married” to it without any real possibility of requesting another.
Unprofitable Demand
- In recent years, banks have taken steps to improve their efficiency, which is reflected in an increased desire for standardization and automation. Consequently, companies’ banking contacts, especially in small companies, are pushed to manage the time spent on each request. Therefore also to filter files that are unlikely to be approved or to avoid applying an overly tailor-made treatment if the profitability potential of the file is limited.
- Thus, any element that weighs down the process requires additional action by the bank; therefore, risks impacting its assessment and processing of the file.
- This can be seen, for example, when the bank has to submit small files to the Participation Fund or the Brussels Guarantee Fund.
Other Elements Related to the Bank and its Environment
Other elements specifically related to your bank and its environment can impact the lending process, such as:
- What is the general economic context and that of the banking sector: growth, stability, crisis?
- What is the sector’s regulatory context: are there increased requirements in terms of the financial soundness of banks, are they more controlled and supervised in their management of granting of credit, do they have increased responsibilities vis-à-vis their customers?
- NB: a more complex situation in the banking sector’s economic and regulatory environment (as it is currently the case), does not fundamentally change the rules for granting credit but leads to a stricter application of the fundamental logics summarized in this article.
- What is the bank’s current risk policy: does it have the will or the capacity to broaden its clientele or outstanding credit?
- What is the bank’s current commercial and segmentation policy: are there excluded sectors, is it open to starters, is it mainly interested in private accounts?
- Who are your interlocutors and the decision-making process? Do you have the possibility of visually presenting and defending your project to a direct interlocutor, is he competent, and does he have real weight in the decision?
Note: Be careful. The more people there are, the more there is a risk of misunderstanding and loss of information.
With this reading grid, you can try to deduce if your expectations are realistic and especially if you have the possibility of increasing your chances of success by adopting one or the other parameter!
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