The Principles of Lending I

Question 1

How does one prepare for a borrowing proposal meeting with an existing customer?

Answer 1

1. How long have they been a customer of the bank?
2. What is their reputation and track record? - Have accounts been maintained in a satisfactory manner with previous borrowing repaid on time?
3. Are there regular lodgements to the account?
4. Are there any charges applied in respect of unauthorised overdrafts?
5. Is there any evidence of items having to be returned unpaid for lack of funds?
6. What are the figures for turnover (the business’s sales), the max balance on the account, and the min and avg balance figures over the past 3 years?

Question 2

How does one prepare for a borrowing proposal meeting with a non-customer?

Answer 2

If an account is being transferred from another bank, ascertain the reasons. Reasons may include:

• unhappy with poor service, high charges or the location of their curent bank
• the borrowing proposals may have already been declined by their existing bank
• the customer is seeking an alternative quotation for comparison purposes regarding pricing etc.

Question 3

Where should information gathering meetings be performed?

Answer 3

The customer’s business premises where possible; otherwise follow up with a visit to the premises

Question 4

What mnemonics can be used to ensure a uniform and consistent approach to lending?

Answer 4

• CAMPARI - Character, Ability, Margin, Purpose, Amount, Repayment, Insurance (security)
• PARSERS - Person (Character, Capacity, Commitment), Amount, Repayment, Security, Expediency, Remuneration, Services
• PARTS - Purpose, Amount, Repayment, Term, Security
• 5 C’s - Character, Capacity, Capital, Conditions, Collateral (security)

Question 5

What information should be obtained to profile individual(s)?

Answer 5

1. Age
2. Qualifications & Experience
3. Financial Acumen
4. Integrity & Reliability
5. Organisational Ability & Efficiency

Question 6

What essential questions help profile individual(s)?

Answer 6

• Has the borrower the experience and qualifications to make a success of the business?
• Can the customer keep within any borrowing limit agreed?
• Does the customer know volume of sales needed to make a profit?
• If goods are sold at a certain price, do they know how much it has cost to produce them and does this price also cover all the overheads and result in a profit

Question 7

What are the key issues used to ascertain the character of the business?

Answer 7

1. Capacity - the capacity of the management, business, industry and how the business compares with industry norms
2. Premises - does the business own or lease its premises? If the premises are owned, is there borrowing? If the premises are leased, what are the terms of the lease? Is there sufficient space for the business to expand?
3. Seasonality
4. Management - does management relate well to each other? Can they identify and agree common goals and objectives? Can they work together as a team to acheive these goals?
5. Plant & Equipment - is the machinary owned, leased or under hire purchase contract? Will it need to be replaced? Alternative means of manufacture?
6. Social Issues - can the business support the drawings of additional individuals and possily their families
7. Succession Planning
8. Technology - is there a technological awareness to ensure that they are not competitively disadvantaged by failing to keep up to date?
9. Staff - recognition/reward schemes; staff morale/turnover; commitment; under/over-staffed; labour relations; dependency on specialist skills; training issues
10. Competition - who are the competitors? What size is the business in relation to its competitors?
11. Legal Issues
12. Product
13. Industry/Business Sector - is the customer’s sector growing (emerging) at a mature phases or declining?
14. Political issues
15. Service
16. Cost Structure - what is the operational gearing?
17. Expediency
18. Market - does the business rely on one supplier or obtain raw materials from a range of suppliers? Who are the customers and what is the potential for expansion? Where is the business in the supply chain?

Question 8

What should one consider when consdiering whether the purpose of the loan is legal?

Answer 8

• If it’s NOT legal - be aware that some customers will be blatant about borrowing for illegal/unsuitable purposes. The bank’s reputation is at risk if money is lent to such customers
• If it IS legal - ensure the following criteria are met:
  
  • Your bank’s own policy on lending to particular types of customer
  • Credit controls imposed by government or financial services regulators
  • FCA guidelines applicable only in the UK

Question 9

What are the basic reasons businesses borrow?

Answer 9

Customers may borrow for one or more of the following. Knowing what you are financing brings you closer to understanding your customer’s business and its needs. The further down this list - the higher the risk of lending!

1. To finance operating costs, variable costs & fixed costs (e.g. wages, salaries, heat, light etc.) until trade debtors are converted into cash]
2. To finance stocks until they are converted to finished goods, sold and the debtors turned into cash
3. To finance the purchase or refurbishment of property, plant and equipment until they are used up over many trading cycles in producing output which is converted to sales and then to cash
4. To finance costs required to support growth e.g. assets, such as stock, debtors & fixed assets, and pay additional operating
5. To finance a change in the company’s ownership, such as a management buyout
6. To finance one-off projects, such as property development
7. To finance survival until the company can be turned around. The business may be leaking cash, making insufficient profits, or incurring losses

Question 10

Give two examples of a business trading cycle.

Answer 10

1. Newspaper street vendor:
   
   • Cash -> Stock -> Cash …
2. Manufacturing business:
   
   • Buy raw materials ->
   • Starter manufacture/work in progress ->
   • Finished goods ->
   • Sell goods ->
   • Collect cash from customers (debtors) ->
   • Pay suppliers & expenses ->
   • Buy raw materials -> …

Question 11

What content does a good business plan contain?

Answer 11

1. Contact Details - business name, registered and trading address, contact name(s), telephone, email & website
2. Synopsis/executive summary - outline of the plan and what the business is seeking to acheive
3. Business background & history - when the business commenced trading, its performance & development since then, notable acheivements & milestones
4. Products or Services - what the business does, with details of their range of products and/or services
5. Process - an outline, if the business is manufacturing a product
6. Market analysis - market size, trends, competitors, segments, service quality, pricing, potential customers, envionrmental issues, legislative issues
7. Marketing Strategy - customers & markets, premises, product or service, promotion, price
8. The Proposal - what benefits will it bring to the business
9. Management/staff - profiles of the management team
10. Property - ownership, value, terms of lease etc.
11. Equipment/capital expenditure - details of necessary expenditure during the period of the plan
12. Financial info - last 3 years’ and projected performance firgures for profit & loss accounts and balance sheets, cash flow projections, funding requirements
13. Risk assessment - senstivity analysis

Question 12

How may a bank recover what it is loaning to a customer?

Answer 12

1. The cash generated from a number of trading cycles
2. The sale of surplus assets to pay down debt (restructuring/downsizing)
3. Realisation of security
4. Sources outside the business which have granted guarantees or by voluntary sale of the business to a competitor or the liquidation of the business