Contrary to what most people believe, banks do not use the "computer says no" approach half as much as is accepted as true.
Most lending comes down to a feel for a deal by a Senior Business Manager, based on the strength of both the management team and the business model.
There is actually, only one number that banks look at to determine whether they will likely lend to a business or not, and that is the debt service cover ratio.
Debt service cover, as defined by Wikipedia, is 'the ratio of cash available for debt servicing to interest, principal and lease payments....the phrase is also used in commercial banking and may be expressed as a minimum ratio that is acceptable to a lender; it may be a loan condition'.
Debt service ratios typically range between 1.5 times and 2.5 times the projected monthly or annual repayment figure.
So using a basic example, if the monthly repayment for the loan required is £100, the bank will want to see that the business has between £150 and £250 net positive income, in order to pay back the interest.
If the business does not have the money available, it is going to default on the payment in month one and is not going to be approved.
Even at this stage it is possible for the lender to take a view on a business. A typical scenario would be where profits are low due to significant re-investment in the business, which will result in higher profits in the near future.
Whilst most business owners argue that they need the funds to make profits, banks, believe it or not, are not in the game of high risk lending (certainly when it comes to commercial mortgages). Funds lent are savers' deposits, and as such they operate with a low risk mentality. Even so, lending decisions are nowhere near as black and white as would initially seem.
In order to understand debt service cover, likely monthly repayments, and the chances of a decision, a commercial finance specialist with significant knowledge will be able to help.
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16 Facts At a click and a glance
1 - Why going into the High Street branch is not the best way to source a commercial mortgage, business loan, or business banking manager
2 - Brand loyalty does not pay. I'll explain why your current bank is not incentivised to offer a better deal
3 - Bank managers that understand your business do still exist, but they are not where you used to find them. Find out where they are, and how to access them
4 - The good news about Business Bank Credit policies: the criteria for assessing businesses is changing regularly, and in the main terms are improving
5 - Why your perfect borrowing history is of little relevance, and why its not personal
6 - You can profit from moving bank, right now, by accessing a much misunderstood fund, as well as improved terms
7 - Different banks like different sectors: what's happened
8 - State-owned banks: an update on where they are
9 - Privately owned banks: an update on where they are
10 - Interest only commercial mortgages: today's marketplace
11 - How a change of mindset can be of great help
12 - Why banks want to know your inside leg measurement, and why it’s not personal
13 - How to work out if a bank will lend to you, right now
14 - Debt service cover: what it means, why its important and the good news coming your way
15 - Why you may need to bank with more than one from now on
16 - If your business does not own property, nor wish to buy one, there are other, new, niche financiers available that can help with your requirements.
About Chris Davidson
Chris Davidson is Managing Director of Discover & Invest Ltd.
He believes passionately in providing businesses with market-leading financial insights that have a positive impact on the bottom line. As a result, Chris helps get the best rates and terms available at any one time.
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