“Debt Servicing Ability” and credit enhancement.
Today we are talking about how banks assess a borrowing client and what you can do to get your loan request approved. A basic principle obviously is that you can pay back the loan. This is called
“Debt Servicing Ability” . It can be demonstrated and if required, improved through credit enhancement.
If figures of your Debt Servicing Ability are not in your favour, then credit enhancement can be a solution. It is important to make it right the first time around because every credit rejection can influence your credit profile. That is why it always makes sense to present your bank with a proper plan evidencing your credibly, showing that you will be able to pay your interest and repay the loan principal.
When a business applies for a loan, the bank follows a certain protocol to evaluate an application. They usually look for the borrower’s Capacity, Collateral, Capital, Character and general Conditions. These are the basic of credit analysis to evaluate the application for the loan.
Banks seek and prefer creditworthy customers to lend to. Each bank has own criteria as to how they arrive at their lending decisions. But in this document, you will learn about internal measures that you just have to apply – before you apply for a loan!
Credit enhancement can get a loan application approved to enable access a credit lines. It helps a company to access credit on improved borrowing and repayment terms. Improved credibility provides any lender with reassurance that a borrower can and will honour its obligation. This will make a company eligible for lower interest rates and better re-payment options.
This is what you should know:
A company can take internal measures to increase its Equity Ratio.
A company can take internal measures to increase its Equity Ratio.
A high equity ratio is associated with a high credit rating. Your internal measures can provide you with ways to improve the Equity Ratio. A high equity ratio is always associated with a high credit rating. For this, see my report “Internal Measures to Optimize and Increase the Equity Ratio in a Company”.
And then, there is your ability to service debt.
By applying smart internal measures as described in this report, you can optimize how your bank perceives your company and evaluates your “Debt Servicing Ability”.
Internal measures eventually combined with Credit Enhancement can increase your chances to be approved for a loan drastically. The information in this document can help any entrepreneur in negotiations with banks to put a borrower in the right light, when talking with a lender. Learn the rules of how the other side thinks!
If required, your “Capital Service Capability” can be built up and demonstrated through “credit enhancement” provided on the basis of certain financial products. When you apply for a loan at your house bank, a process is set in motion that includes several steps for them to evaluate “Capacity, Collateral, Capital, Character and general Conditions”.
Initially there is an assessment to determine your creditworthiness and rating. These are crucial issues and questions as to whether and under what basic conditions you can get a loan.
The second aspect under which your loan application is assessed deals with the issue of security. Banks do not issue unsecured loans, but usually secure themselves, for example through land charges, benefitting from the assignment of collateral, securities, sureties, corporate guarantees, insurance- or bank guarantees etc.
Now maybe you could say: I am creditworthy, I have a lot of collateral that I can provide, for example a free land charge. So I’m entitled to a loan. Unfortunately, it’s not that simple. A bank is not a pawnshop.
It is important for banks to build up a long-term stable business relationship and to have customers of substance and good standing. That is why a bank always has a great interest in the fact that loans can also be serviced and repaid. In order to ensure this, the ability to pay debt is checked.
For this, you have to demonstrate your Debt Servicing Ability.
So while the rating determines whether and under what conditions you will get a loan the “ability to pay” determines whether the desired loan amount is possible and whether you can repay it from the surpluses of your business within a reasonable period of time. In concrete terms, the ability of a borrower to service the debt is checked as to whether interest and repayments can be made from the operating surplus from the operating business, and whether interest payments repayment of principal can be made. To this end, a special look is given to excess liquidity. If internal measures cannot optimize your overall financial situation to demonstrate excess liquidity, credit enhancement methods can be implied to improve this.
Let’s now take a closer look at what is essential for the ability to service the capital. First of all, it is not just the company’s financial profit, but the cash flow, i.e. the flow of liquidity, or the inflow of liquidity. It will not only be the pure cash flow, but only the cash flow that is operationally caused and results from the company’s regular business activities.
So if, for example, as an industrial company you sell a machine once a year and thus generate a large flow of liquidity but your production stops after a year, then your bank will not like it. If you have determined the operating cash flow from the operating profit, there are still a few deductions to be made. These are all those liquidity factors outside the profit and loss account, i.e. outside the company’s profit determination. These are, for example, distributions to shareholders or private withdrawals by the owner, but also smaller investments that you make from the current cash flow without having to refinance.
What then results is the “debt service limit”. This debt service limit is compared with all the interest and repayment payments incurred (including those resulting from the loan that may have applied for). If there is still financial leeway, then you may be regarded as capable of servicing debt. You evidence your Capital Service Capability! If projected resulting figures appear not to be in a borrower’s favour, credit enhancement can be arranged by evidencing required cash funds in blocked accounts and other methods.
When analyzing annual financial statements, attention is always paid to whether a company was able to service debt in the past. What is really important, however, is to know or to anticipate whether a company will be able to serve capital in the future, because the repayments of the loans will also take place in the future and not in the past obviously.
It is important to make it right the first time around because every credit rejection can influence your credit profile. That is why it always makes sense to present your bank with a proper corporate plan, on the basis of which can credibly show that you will also be able to pay your interest and repay the loan principal.
If you have issues requiring credit enhancement measures, schedule a call with one of our experts. Call +353.86.0325153 which also works as Whatsapp, Signal, Telegram and WeChat.