Loan or overdraft?

NotesCBE

Loan or overdraft?

Factors that the bank will consider when deciding whether to grant a loan or overdraft

  • The character of the borrower

    The bank is likely to require a personal interview with at least some of the directors of a Company. 

    The bank will also assess integrity by reading the financial press and searching the internet for any signs of any disputes between the company or its directors with any other companies, organisations or individuals.

  • The ability to borrow and repay

    The bank wants to be sure that a Company will be in a position to repay the money. 

    This assessment of the ability to repay will include as assessment of the company’s key ratios.

    In considering the company’s ability to repay, the bank will consider the levels of any outstanding debt.

  • The margin of profits

    The bank lends money in order to make money. 

    Most banks have lending policies which require them to charge different interest rates to customers depending on the reason for the borrowing. 

    This is because some types of lending are more risky that others, therefore higher interest rates reflect higher risk.

    The bank may want to take some form of security for the lending, probably over the company’s property.

  • Purpose of borrowing

    The purpose of borrowing affects not only the interest rate but also the bank’s decision as to whether to lend in the first place. 

    It will normally lend in order to finance working capital, provided that the company’s liquidity position is still manageable.

  • Amount of borrowing

    Firstly, the bank will need to make sure that a Co is not asking for more money that it needs for the purpose specified. 

    If it is, this casts doubt over its ability to repay.

  • Repayment terms

    Banks will pay close attention to the repayment terms when considering granting a loan. 

    Obviously, being sure that a borrower will repay is critical and a bank should not lend money just because the borrower has security for the loan. 

    Taking ownership of and selling any of the borrower’s assets is really a last resort.

    Payment terms need to be clearly agreed, documented and realistic given the borrower’s financial position.

NotesCBE