Understanding the Small Firms Loan Guarantee Scheme (SFLG)  lending criteria

(This is the third in a series of articles about the benefits of the Small Firms Loan Guarantee Scheme)

In order to maximise your chances of being successful with a Small Firms Loan Guarantee Scheme application it is vital to understand the psychology of lending from the banks perspective.

Many of my clients have complained to me over the years that the banks have been unreasonable in how they have judged their commercial debt applications. What they really meant was that they did not understand the banks criteria for successful lending.

In the old days before non status borrowing, banks rigorously applied the principle of The Three C's.

The three C's of lending are Cash, Credit and Collateral:

CashCash is probably the most important of the three because without adequate cash or cashflow to repay any loan your bank will simply not be interested in lending you money.
Some of you will ask "but surely if I have good enough security the bank will have no concerns about lending me or my business the money?"
The banks would rather not have to recover a debt by calling in a borrowers security so it is vital they are convinced any potential borrower has adequate cashflow to cover the repayments

Credit (History)Sometimes referred to as "character" is concerned with the credit history of the borrower. Those businesses and individuals that have repaid their debts in good time and within the terms agreed in the past will usually have a good credit rating and be considered a good credit risk. Those that have not will have a poor credit rating and be regarded as a bad credit risk.

CollateralCollateral is the security the lender uses to cover the potential non payment of the debt. The risk to the lender is the possibility of default and the reward is the interest on the debt being paid. There is often a direct relationship between risk and reward i.e. when risk is high then interest will be high and when risk is low then interest will be low.
Every lender calculates a Loan to value Ratio (LTV) on the collateral being offered as they know if they have to foreclose on a debt they will only be able to reclaim a percentage of the current market value in a forced sale situation.
It is important to recognise that collateral never makes a bad loan good. The last thing a lender wants to do is have to foreclose on your collateral.

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