Some Do's and Dont's for your bank loan proposal

• be honest
• be realiable
• be realistic
• be consistent
• be punctual
• be meticulous in observing credit limits
• be good at communicating
• keep the banker informed of:

1. the activities undertaken even where the account operates on a credit basis
2. seasonal fluctuations which are foreseen
3. problems which are foreseen, and the actions which are to be taken to solve them.

• ascertain when your credit limits are due to be reviewed.

• advise your Chartered Accountant accordingly and co-operate with your Chartered Accountant to ensure that the required information is available to complete your financial statements in adequate time.

• be dishonest
• be unreliable
• be unrealistic
• be inconsistent
• ignore agreed credit limits
• ask for too much or more than you really need
• accept income tax advice from your banker
• accept your bankers advice as to where new loan proceeds should be deposited and where subsequent repayments should be made from without checking on the income tax implications.

Your Loan Application

The basic ingredients of


• Character
• Capacity
• Capital
• Collateral


will be assessed in every lending proposition against the


1. Personal factor
2. Purpose of the loan and priority
3. Payment or repayment
4. Protection or security
5. Perspective or overview

Personal Factor

The “personal factor” is the prime consideration in any lending proposition and it is the one essential ingredient which must be “right”.


Even when lending to companies, it is the Directors and Management integrity and abilities that first come under scrutiny.

Ultimately, Banks lend to people; upon the Bank making an assessment of the “personal factor”, reliability, commonsense and experience of the borrower will be carefully considered.

The borrower must also convince the Bank that the financial affairs and accounting function of the business is in capable and trustworthy hands; coupled with prospects of confidence and optimism.

Obviously, bankers do not lend on poorly planned or unconceived projects
The loan proposal and Business Plan must clearly demonstrate: "that the borrowers know and understand what they are doing; and that the business is run efficiently"

No prudent banker will become involved in a lending proposition if the personal factor looks unsatisfactory at the outset.

Purpose of the Loan and Priority

A banker needs to be assured that the loan applications purpose is legitimate and is of benefit to both the borrower and the Bank. Additionally the request must be appropriate to bank lending (which is basically short to medium term).

Payment – or Repayment

When a Bank grants a credit limit or a loan it expects that the arrangement will be observed. The customer must therefore demonstrate that they can meet the obligations with reliability.

Accurate and realistic cash flow forecasts, which demonstrate that the project is viable, must be presented with a loan application to demonstrate that a repayment program can be achieved.

Assessment of forecast profitability and balance sheets together with notes detailing the underlying assumptions should also generally be presented in support of the application.

In some cases, the Bank may require regular reporting on the actual progress achieved compared with the forecasts initially supplied. This may mean that a business is required to account for variances at a much earlier time which may, in some cases, save the business and lead to action being taken to put it on the right tracks.

A customer with a good history with the Bank (e.g., meeting agreed obligations and showing integrity) will receive a fair consideration of their proposal.

Protection or Security

“Security” is the protection taken to make a loan safe.
A banker will not lend if there appears a real need or possibility of having to realise on the security. Realisation is the absolute last resort.

The loan proposal must be sound before the question of security is considered. Good security alone does not make a loan satisfactory.

Valuation of the asset/s used as security are very conservative due to experience proving that anything sold under forced / mortgagee sale conditions realises much less than expected.

Personal Guarantees (PGs)

Personal Guarantees are the easiest of documents to sign but are the hardest to enforce. An unsupported guarantee, even from a person of considerable wealth, can be difficult to collect. Few people signing and even fewer think that they will ever have to pay, but with every guarantee there is a legal obligation to pay if the principal debtor defaults.

In some cases, Personal Guarantees are necessary from a banker’s perspective. They become essential when lending to a private company where the security is a debenture over the assets involved.

Perspective or Overview

This includes all and any other relevant factors, which may have a material bearing on whether the loan is approved such as:

• the history of relationships
• have past arrangements been kept?
• have cheques been issued in excess of arrangements?
• does the applicant and his family support the bank?
should they?
• where do deposit funds go?
• does the customer chase high interest rates with the bank’s competitors?
• what other bank services are used?

Should problems arise, the Bank must be kept informed and must have confidence from all cards being laid on the table. Problems and troubles will arise if a customer attempts to deceive their Bank.

Keep the Bank advised of progress and let the banker do some of the worrying.

The following will always be considered:

• the people involved (the personal factor)
• the financial stability of the applicant
• the capacity to service the loan and adhere to arrangements
• the history - borrowing record
- deposit support – past and future
• planning and prospects
• priority of the loan
• is the request and repayment programme realistic
• has the proposition been well submitted with all facts and information available
• what equity is the applicant contributing

Need with applying for a loan?