How to approach bank lending

It is always worthwhile for a potential corporate borrower to understand how the decision making process for lending works in most banks in a bit more depth. 

I would advise a finance director or CEO to take their request to the bank for a material amount of debt in the same way they would approach an ageing and slightly deaf maiden aunt with the offer of a day trip to the seaside. 

Like the older generation, financial institutions – banks in particular – generally prefer a lack of surprises, an element of routine and some advance planning. Turning up excitedly and unannounced at great aunt Harriet’s door saying, “Get your coat, we’re off!” risks being met with a host of excuses about the weather looking a bit cloudy, a whist session with friends already being in the diary or not wanting to miss a decent Cary Grant film on the TV that afternoon. 

It’s better to undertake some advance planning. Show the route you’ll be taking, where the rest stops will be, what time you’re planning to have lunch on the sea front and when you will all be heading home, and you’ll stand a much better chance of getting the outcome you want. The tactics that the potential borrower can use in real life with a bank include pitching the proposal in good time to your relationship manager and using a well written business plan with a decent set of historic numbers and projections. 

The owner-manager will probably only be interested in the upside of the project he is seeking debt for, perhaps focussing on the increased sales, lower costs or better margins the initiative will bring. Banks and their risk officers however will want to consider the downside more. For example, what happens if sales slip, margins reduce or working capital gets squeezed? 

What could go wrong and make the bank’s lending look vulnerable. will be one key issue on the banker’s mind. Don’t be shy to illustrate some downside sensitivities in your business plan for the bank, and show that there is headroom in the projections. 

The lender will usually ask about downside scenarios anyway, so providing some examples yourself demonstrates you and your advisors have thought the options through. A well explained case and plenty of notice to consider the proposal should lead to a positive outcome with both the bank manager and great aunt Harriet.

The man with the money is a senior banker at a major financial institution specialising in mid-market lending.

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