Due diligence is a critical stage in the process for obtaining external business financing. Banks have whole departments devoted to the credit appraisal process, and their job is to ensure the viability of loans made by the bank. In performing this role, the following may flag up as big risks which might curtail the lending process.
‘New’ information discoveries during credit appraisal / due diligence
Credit analysts do not like discovering ’new information’ when assessing your business’ credit-worthiness. As soon as the conversation begins for accessing a credit facility, the entrepreneur is advised to bring all relevant information to the lender’s notice. You must especially tell your bank about existing loans, liens on company assets, ongoing litigation and any unrecorded liabilities that impinge on your ability to service your obligations or continue as a going concern. If you are not sure you have met all disclosure requirements, ask the relationship manager.
Lack of data to support financial statements
Most lenders will ask for your company’s audited financial statements in their assessment procedures. They will then attempt to develop a more complete picture of your operations through requests for either internal data like sales books or third party documentation such as bank statements and significant contracts. If these cannot be vouched to support your financial projections, doubts arise about the authenticity of your financial records.
Lack of separation between business and owner
Entrepreneurs who do not make a clear distinction between themselves and their businesses will set off bells about financial discipline. Not having a separate business bank account, making personal expenses out of business funds and increasingly, not paying yourself a salary (how do you survive, if not through company funds?) are all symptomatic of bad corporate governance. And no finance house wants to lend to a badly run company.
Non-compliance with regulatory requirements
Is your business in a regulated field? Does the law require you to have peculiar certifications or operating permits to operate in your industry sector (e.g. Food and Drugs Board (FDB) certification or Environmental Protection Agency (EPA) approval)? Not having the required certifications will most probably curtail the credit process at due diligence as the company will be operating informally. This is also true for more generic requirements such as Company Registration Documentation and Certificates of Commencement.
Insufficient Capacity to borrow
Your company’s financial statements say a lot about the business’ capacity to ‘absorb’ new funds. While most credit applications will spell out the intended use of funds, most do not clearly define how the proposed project will pay back the facility. Since credit houses are in the business of ’selling’ money for a profit, the capacity to repay is the most crucial consideration in their appraisal. Recent anti-money laundering and anti-terrorist financing laws also place extra due diligence requirements on banks in their lending activities – they must be absolutely sure that any funds they advance will not be diverted to support illegal activities.
Credit: Servled
