Bankers take their Campari seriously
In the first of two articles for CRN, Stephen Fenby explains the decision-making process of a bank when it looks at customers who are asking for more money
In the early 1990s I had the dubious pleasure of spending two years working in the credit risk team of one of the major clearing banks. During that time, I came across a number of techniques that are used by banks to appraise new lending applications.
One rule of thumb was spelt out by the acronym campari. To a lending banker, campari is not something to be sipped at a summer garden party, but a mnemonic guide to lending decisions.
A banker will initially look at the character of their customer. Is this a person of honesty and integrity? How long have they been a customer? Has it been a good working relationship?
What is the customer’s ability to run a successful business? Is it growing profitably? Is working capital being managed successfully? Is the business generating cash? Has the customer delivered on their business plan and been able to adapt to changing market conditions?
What are the customer’s means? Does their business have significant net assets? Are profits retained in
the business? How much have the shareholders invested in the com-pany? Are the shareholders wealthy in their own right? Are the shareholders private individuals with limited cash or institutions who could invest more if needed?
What is the purpose of the advance? For example, is it being used to fund the purchase of product for stock or is there a specific customer deal? Is it to be used for capital equipment?
What is the amount required? This sounds like a straightforward question, but quite often customers did not really seem to know how much cash was needed and where it would be used.
What is the rate of interest payable? Is the bank being asked to match a very thin margin? Is the return commensurate with the risk?
What is the insurance (security)? These days, a bank will look for full security for lending up to about £3m. Above that level, some unsecured lending may be possible, provided a strong case is made.
It is likely that you will have good answers to some, but not all, of the questions above.
So how do you ensure that you get a proper chance to present your case to the bank and explain your way around some of the weaker areas?
Even if you get a very good hearing from your relationship manager, the final decision on a new facility may well be made somewhere within a central credit team.
Therefore, if you don’t present your own funding document, you will be entirely dependent on the manager’s notes. Are you absolutely sure they really understand your business and your prospects? Do you know how good their written presentation skills are? How good a reputation do they have within the bank? Is their judgement trusted?
I would always suggest preparing your own business plan or funding document and it should be succinct – it is possible that the person reviewing it in central credit will have 10 others to review and decide about on the day that yours arrives.
The key point is that you can be sure your case is presented in the way you wish, to whoever is involved in your decision.
Next month, my own mnemonic: CORDIAL. Is trade credit more sober than bank finance, or simply friendlier?