Principles of Borrowing
As a borrower carefully consider the following:
The Lending Manager’s task is the MANAGEMENT OF RISK and to be successful at this he needs to be conversant with certain principles which can best be remembered by the mnemonic PARSER.
There are very few ideal propositions and as a result it is a matter of judgement whether funds can be safely and profitably lent.
The Lending Manager’s function in this respect is
- To identify in what ways any proposition falls short of ideal
- To establish what the risks are and whether they are acceptable to the Bank
- If acceptable, to structure the borrowing in such a way as to minimise that risk and negotiate an acceptable reward in return.
Whether the funds are to be advanced by short, medium or long term financer or through equity capital or export finance the general principles stay the same.
P = PERSONALITY
- CHARACTER – Who is the borrower? How long has he been a customer? What is his background? Is he a man of integrity and reliability?
- COMPETENCE – What is his record? Has he the management, accounting and technical skills? What is his experience in the particular field for which the finance is required? What is the strength of the management team?
- CAPACITY – Has he the energy for hard work to use the advance and make sufficient profit to ensure repayment? What is the condition of existing resources? Are they adequate? Are there any constraints of an economic, legal or local nature? What are market conditions? Has he put together a business plan? Has he taken advice or had training?
A = AMOUNT & PURPOSE
- AMOUNT – How much is required? Is it sufficient or too much? Is the proposition supported by a cash flow forecast and accurate costings? Has allowance been made for increased working capital requirements? Is the proprietor’s stake acceptable?
- PURPOSE- What is the reason for the advance? Is it suitable as a banking proposal? How should the borrowing be structured? Is a ‘Group’ package worth considering? Is it a new venture?
R = REPAYMENT
- SOURCE – Where is repayment to come from? income? sale of assets? profits? Is it reliable and reasonably certain? Do we have a profit and/or cash forecast? Is there a secondary source of repayment as a ‘back-up’?
- WHEN – Have repayments been fully appraised and related to existing and future commitments? Are repayment proposals realistic or optimistic?
IF THE P, A AND R ARE NOT ACCEPTABLE – GO NO FURTHER
S = SECURITY
- SECURITY – Unsecured advances are the exception rather than the rule. No amount of security will make a bad proposition good. Balance risk with reward.
- APPROPRIATE– Is the security appropriate to the advance and to the structure of the business? Is it easily valued, readily realisable and of stable or increasing value? Is it properly valued?
- COMPLETION – It is essential that security is completed or perfection can be finalised without further recourse to borrower before advance is made. Suitable Insurance cover should be completed when appropriate.
E = EXPEDIENCY
- PERSPECTIVE – There are occasions when the principles of good lending are breached in favour of expediency, but this should be kept in the right perspective. To be fully – OBJECTIVE, consideration of this factor should be ignored and in any event expediency should not lead us to lend unwisely and unsafely.
R = REMUNERATION
- TERMS – need to be negotiated from the outset with provision for periodic review if considered necessary.
- MAY VARY – in the light of economic conditions and the market place in which we operate.
- RISK – The REWARD should relate to the RISK entailed and the customer AFFORD to borrow without impediment to his repayment programme.
BANKERS ARE IN BUSINESS TO MAKE A PROFIT