With the country in lockdown and the future of individual companies and whole industries in question, most lenders are reviewing eligibility criteria for loans and some aren’t currently providing capital at all.
Lenders that rely on algorithms to lend may struggle to make decisions. This approach to lending is difficult because models aren’t built to assess the business environment during a pandemic.
Business performance four weeks ago is now much less likely to indicate future success. Past performance, capital reserves, adverse financial events and profitability all have some relevance, but what’s more important is how a company is planning to manage the current circumstances.
Factors that matter now include, how the business is structured to weather the coming storm, the industry they operate in, exposure to risk and the clear-headedness of the founders. However, no algorithm provides this information.
Although the current environment is very different and we are looking at companies in the context of the COVID-19 crisis, our approach to lending has always been to look at each lending application on its own merits rather than apply a set formula. Despite the new circumstances, our approach has not changed.
To help our broker community, we’d like to share some of the key areas we’re reviewing when making lending decisions.
Every business is different, and we take the time to look at individual circumstances. It’s always been essential to understand how a company plans to deploy funding and service repayments. In the current crisis this is more important than ever; we need to see that a business has a realistic plan that explains how it will navigate the challenges.
We don’t need a lengthy business plan, but a one-page executive summary that covers how the capital will be deployed and why the lending makes sense for the business is very helpful. Aside from showing the company has clearly thought through the applications, it also demonstrates a commitment to the process.
2. Scenario Planning
It’s always prudent to address the worst-case scenario, and now this comes into even sharper focus. No-one knows how severe the pandemic will be for the economy, but we need to see that a business has considered a bad outcome.
If the plan shows a positive return to trading and it’s well qualified, that’s fine, but we also need to understand how the business will remain viable if revenues return more slowly.
3. Risk Analysis
If the business is clear on its specific risks, this helps us to evaluate the lending application. We like to see the top three threats to the company, and again this is highly business-specific.
For a retail business, this might be that intermittent lockdowns equals an X% drop in revenue over two years. For a manufacturer, it might be a key client cancelling a contract. Each risk can then be weighted in terms of likelihood and a contingency plan can be outlined.
4. Contingency Planning
We want to understand how a business will cope if the worst-case scenario happens. This will vary considerably depending on the sector but should allow for a reasonable worst case of a three to six-month lockdown and then the economy not returning to pre-pandemic levels for two years.
Every business will have different exposure to prolonged economic slowdown; we just need to see a precise analysis of how a worst-case scenario might look and a plan to manage that situation.
In summary, we will be looking for clarity and a solid plan that accepts the extreme uncertainties the economy is facing.
Our team are always willing to pick up the phone and discuss an application. We’ll always try hard to find a solution, and if we can’t help, we’ll let you know quickly. To discuss a loan of between £10,000 and £1m, please get in touch with one of the team at email@example.com or on 0161 451 5710.