They are watching the IRD situation. Current tax position, repayment arrangements, history with the department. A business that is behind on tax, or in a repayment plan, or has a track record of needing to negotiate, is read very differently to a business that has stayed current. Most owners do not realise how much weight this carries. Doug sees this play out regularly. Applications stall not because the business is unviable but because the IRD history raises questions about discipline.
They are watching customer concentration with new seriousness. If twenty percent of revenue comes from one customer, the bank is now treating that as a material risk in a way they were less concerned about four years ago. Owners who have grown a b The conversations I have with bankers tell me something different than the ones I have with business owners.
Owners, when they think about borrowing, mostly think about whether they will be approved. They prepare for the bank by polishing the things they think the bank will look at. Revenue. Profit. The bottom of the P&L.
That is one of the things the bank looks at. It is not the whole picture, and in the current market it is not even the most important part.
To make sure I had the lending side of this right, I sat down with Doug White, a financial adviser at Finsol in Auckland who spends his days inside these conversations. Doug specialises in mortgage and business finance, and what he sees from the broker’s seat tells a clearer story than what most owners hear directly from the bank. A lot of what follows comes from that conversation. The framing has shifted in the last couple of years in ways most owners have not caught up to.
Here is roughly what banks are watching.
They are watching debt servicing coverage closely. Usually across the most recent financial year, sometimes the last two depending on the size of the lend. And it is being stress-tested at 100 to 200 basis points above current fixed rates. That is one to two percent above where you are actually paying, which is a meaningful jump from where the buffer used to sit. As Doug put it to me, if the business cannot service the debt under that stress scenario with a real buffer, the conversation gets difficult, regardless of how strong the most recent year looks.
They are watching the quality of the receivables book. Not the total amount owed. The aging profile, the concentration, and the pattern of how it has moved over the last twelve months. A receivables book that has been getting older quietly, even by a few days a month, tells the bank something about the business that the P&L does not. usiness around one or two large customers are being asked harder questions about what happens if those customers leave.
They are watching the gap between the management accounts and the annual financials. If the management accounts the owner produces during the year do not line up with the financials that come out at year end, the bank reads that as a sign that the management information is not reliable, and they make decisions accordingly. They are also looking at what has been filed and what has been provided. Many owners do not realise this is being watched at all.
They are watching forward-looking forecasts much more carefully. Not just whether one exists. Whether it is realistic, whether it has been updated recently, whether the assumptions hold up when pulled apart, and whether the business has met its own forecasts over the last few years. A forecast that has been consistently optimistic and consistently missed is worse than no forecast at all. And increasingly, as Doug pointed out, the bank wants the forecast reviewed and signed off by the owner’s chartered accountant as part of the application process. A forecast that is only the owner’s view carries less weight than it used to.
They are watching the owner’s own financial position. Personal guarantees are common, and the bank’s view of the business’s strength is influenced by the owner’s personal balance sheet. Owners who have left their personal financial structure unattended are not making it easier for themselves when they need to borrow.
What this means in practice is that an owner who wants to borrow well, or who wants to refinance well, or who wants to be in a strong position when an opportunity comes up that requires capital, needs to be running their business in a way that anticipates what the bank is going to look at, not what the owner thinks the bank is going to look at. The two are not the same.
The owners who get the best terms are not the ones who prepare for the bank meeting. They are the ones whose business has been quietly preparing all along.
If you are planning to borrow in the next two years, the work to make that conversation easy is not work for next year. It is work for now.
Thanks to Doug White at Finsol for the conversation that shaped this piece. Doug specialises in mortgage and business finance and sees the inside of these applications every day. If you are weighing a borrowing decision and want to talk to someone with that perspective, he is well worth a conversation.
Murray.
