Why spend the time and effort to write your own credit application? Isn’t that doing the bank’s work for it? Here are just a few reasons:
Borrowers have access to all the information
It’s critical to the company’s future but just another deal for the bank
Borrowers won’t get to see the application that gets presented
An up-to-date generic credit application will make it easier to get another opinion
Credit Decisions No Longer A ‘Black Box’
There used to be more variation in the way banks made credit decisions. Since the 2008 financial crisis regulators are looking more closely at bank’s loan portfolios and credit processes. They’ve required banks to use common terminology and metrics so they can understand and assess what they’re looking at.
Standard & Poors (S&P) and Moody’s rate most of the major private and public debt in the world. They are the source of standardized terminology and approaches to analyzing credit. US law passed after the last financial crisis requires them to make their methodologies and criteria available to the public.
Borrowers can prepare generic credit applications that will be similar to what any bank needs for their own process. Giving a draft to the bank reduces the time and the likelihood of errors in the application process and prepares a borrower for negotiating.
Other benefits of doing this work in advance:
It will highlight potential issues that the borrower can address in advance
Borrowers will get insight into what drives a lender’s negotiating strategy
After the first time, it’s relatively easy to keep up to date
A well-prepared credit application complements the corporate strategic plan. Where the strategic plan focuses on upside and opportunity and is the responsibility of a CEO, a document that reviews the company’s credit profile is the responsibility of the CFO. A strategic plan sets out direction and action plans, the credit narrative is about the risks and how best to manage them. Together they are a comprehensive guide for the road ahead.
I wrote a column on the Do-It-Yourself approach to credit writing for Business In Vancouver. You can see a copy at this link.