Philip Pawson, lead underwriter at rebuildingsociety, explains what he is looking for when assessing a loan application.
You will no doubt have heard the phrase "cash is king"; there is a great deal of truth in that. Companies that successfully manage their cash resources are likely to be successful and survive while those that fail to achieve this are usually headed for doom. You will find very few examples of companies that are wound up while still having significant cash resources. Any mounting, unpaid liability to HMRC is often a good indicator that the business is running out of cash. Although our lenders are often willing to step in and supply a loan to improve the liquidity of the company, the interest rate that accompanies this is likely to be significantly higher than circumstances where a loan is required to expand the business or to take advantage of a particularly lucrative contract.
Very often applications are made to us when the cash is not going to be used for business expansion but is to fund either another company within the group or a lavish lifestyle for the directors. Neither of these appeal very much to our lenders and if the loan is to be filled it will probably be at a high interest rate.
COMMITMENT TO THE BUSINESS
I am actually looking to see that there is a commitment to the business from directors. This is occasionally demonstrated by significant share capital but usually the share capital is minimal. However, a healthy balance of retained reserves from previous years' profits is a good indication that the directors are committed to the company in the longer term.
The judgement about whether to lend to such companies always remains with the lenders but it is my responsibility to ensure that their judgements are made in the light of full information. Consequently I always look to see what dividends the directors have taken in the past year or two and ensure that this information is disclosed on our financials tab. Large intercompany loans to other connected companies are also disclosed separately.
THE VALUE OF CONSISTENCY
We often ask for other evidence to support the financial statements and when I scrutinise this I'm always looking for consistency. Inconsistencies between independent evidence and the financial statements will always have to be thoroughly explained before I will approve the company for listing on our platform. To this end key people should always be willing to speak with me or answer my written questions. Any attempts to prevent me speaking to the appropriate person in the organisation would always be regarded with suspicion and is likely to lead to a refusal of the application.
The platform allows the applicant business to give a narrative description of the type of work that the business does and to say what it will use the money for. I always look at this to make sure that no exaggerated claims are being made about past achievements and that the predictions about the use of the money are reasonable and not inconsistent with what I read about the company in the financial statements.
THE IMPORTANCE OF ASSETS
Very often loans are secured on the assets of the business and consequently I pay particular attention to the fixed assets. The depreciation policy has to be reasonable and applied consistently. I hate to see a depreciation policy that is inconsistent with financial standards and I am often suspicious of valuations that are done by directors. It is usually in order to strengthen the look of the balance sheet rather than to give better information for the management of the business.
When looking at the management accounts I like to see that they are kept on a regular basis and I am always impressed if the accounting system makes a depreciation provision. Not all systems do this but where depreciation is not calculated until the year end it means that the directors have been working from poor quality financial information throughout the year.
A key indicator of whether the management are using the management accounts as a tool to help them manage the business is to look at whether the year end accounting adjustments prepared by the accountant for the statutory accounts have been put through the nominal ledger. If they have not, then many of the key figures in the management accounts will be inaccurate and therefore cannot possibly be used for quality management information. A business that is running without using quality management accounts information is failing to use a very useful tool that can help to improve many aspects of the company, in particular its management of cash resources - hence the need to come to us for a loan.
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