Assessing risk: the key to writing a successful credit application

Assessing risk: the key to writing a successful credit application
by admin-acuityfund
Written Articles by Ranjit (91)
Posted on September 09, 2020

Putting together a strong and comprehensive credit application on behalf of a prospective commercial borrower is a skill. But understanding the nuances of each lender comes with experience.

First, you need to put yourself in the lender’s shoes: is there anything about the borrower or the asset they want to finance that would ring alarm bells? What would concern this particular bank? Is there a certain type of borrower they are unwilling to fund?

Understanding a lender’s risk appetite is just the beginning. Brokers must also have a clear idea of the lender’s perceptions. You need to know what their doubts are. What are they most afraid of? Who are they unwilling to lend to?
Many years ago, I was engaged to arrange finance for a property developer in Lismore, New South Wales. The project was a block of units. The finance required was about $10 million and the developer had 120% of debt cover in pre-sales completed. As usual, I stress tested it and looked for any possible weaknesses before submitting it to the bank. There wasn’t any – it looked like a done deal.

But the bank knocked it back. I couldn’t understand why – it met their criteria; the risk was mitigated with pre-sales and the developer had a good history. Finally, after arguing with the bank, I got to the bottom of it. The bank – one of the big four – was uncomfortable financing a project in Lismore. Their decision had nothing to do with the deal or the developer, but rather the region where these new residences would be built.

More recently I was tasked with securing $40 million for a residential development in Sydney’s north west. Again, the deal checked out and I could see nothing that would ring alarm bells with the bank – again, one of the big four.

But they knocked it back. This time, however, were able to find a solution for the client. Understanding the bank’s preferences made us remember that perception is reality. Sometimes it just comes down to changing the lender’s perceptions.
Like many of the big four, this bank had offices across Asia. As a commercial broker that focuses on the broader Asia Pacific region, we have relationships with the big four banks overseas. We sent the deal to the Hong Kong branch of the bank and they agreed to look at it immediately. That team sent the loan to the same Sydney credit team who had rejected it, and it was approved instantly.

Understanding biases and perception is critical in commercial lending. Sometimes you just need to think outside the box to identify a solution for your client.