Throughout Australia, commercial lending from traditional financial institutions continues to shrink, despite a strong economy. According to Industry Super Australia, commercial lending has plummeted, over the past two and a half decades. Instead of being focused on capital formation and long-term economic growth, banks seem to be shifting their attention toward home purchases and refinance deals.
Navigating the Commercial Lending Market
Not surprisingly, this has created widespread frustration throughout commercial loan applicants, and businesses are wondering what they can do to get the capital they desperately need for expansion and growth. There are three C’s that the traditional commercial lenders look at Character, Collateral, and Capacity.
Commercial Lending Checking Character
In order to navigate the shrinking commercial lending market, companies must be aware of what traditional lenders are looking for in new business loan applications.
First, banks will assess a business’s character – that is, the company’s credit history. Lenders want to be sure that a business has a long-standing history of repaying debts, profitable operation, as well as healthy past relationships with other lenders and vendors. If a business has been plagued with bad credit, a traditional business loan may not be quickly available through a bank.
Commercial Lenders Evaluate Collateral
Lenders will also review a company’s ability to provide collateral for a new business loan. Business assets are used to back a loan, either in full or in part, in order to greatly reduce the risk for the bank. Pledging assets for a business loan may be a viable option for some, but it may create a situation where borrowing more capital at a later time could be a difficult task. For those companies without collateral to offer up to a bank, traditional lending may not be an option.
Ability to Payback – Capacity
The last aspect of a business loan application that banks will review is the company’s capacity, or its ability to pay back debt obligations from company earnings. Numerous financial documents are required to prove the financial stability of any business, and this creates a complicated scenario for companies that require an influx of capital in a short period of time. If these documents are not in order at the time of application, banks are much less likely to start a business relationship with the applying company.
Non-Bank Lenders to the Rescue
As the cost of capital formation continues to increase, it is important for businesses to be aware of and understand options both with the bank and with alternative lenders. For companies with bad credit, little to no collateral, or those who find it difficult to produce the financial documentation some banks require, seeking capital from a source other than a traditional bank may be the only option.
Fortunately, low doc loans exist that simplify the application process for business owners, and some alternative lenders can work with companies with bad credit or otherwise insufficient collateral to offer. In order to make the best decision for you business, it is important to understand the three C’s in lending as well as the full array of options available to your company.
Don’t meet the three C’s? Check out Australian Lending Centre’s business loans!