The Sydney Morning Herald quoted the small business Commissioner Kate Carnell as saying that if borrowers sprayed around loan applications willy-nilly, they could damage their credit reputation even if the applications were not declined.
Applying to multiple lenders for a loan
I have certainly seen many clients who have made rash loan applications to banks that would almost certainly encourage the banks to refuse them. In such cases it is true that the potential borrowers may have damaged their credit reputations. However if they had taken the trouble to prepare good loan applications designed to sell their virtues as borrowers who would service and repay their loans on time, their reputations would have remained intact and they would most likely have obtained the best loans available. GBAC fees are worth every dollar in the benefits they bring and the time they save.
Step one in the process of applying for a loan is to prepare an impressive loan document that tells the bank who the borrower is, what their cash management history has been and the reason they want to borrow. There are many factors that can be combined into such a loan application. The idea that such a loan application can somehow be replicated by filling out a standard bank form is simply nonsense and many of the borrowers who have filled out those bank forms have not in any way understood the figures that they were giving the bank, or the reasons why those figures should be taken to have been correct. At GBAC and FairGO we take great care to ensure that loan terms can be met by borrowers. We don’t take half as much notice of fanciful budgets as banks do. Better to tailor the loan to what the borrower can afford, even if we have to persuade the bank to modify standard terms and conditions.
Don’t hunt loans without proper preparation
But I would take issue with Ms Carnell for whom I have the greatest respect, on the question of whether a borrower should approach a number of financial institutions in order to obtain a loan. In the days before bank deregulation in the mid-1980s people usually stayed with one bank and borrowed from that bank that they had used for decades. The reason was that if they had a loyalty to the bank, the bank had a loyalty to them and knew them, so that they did not have to convince the bank manager of their ability to handle the loan.
Competition brings concessions
After bank deregulation banks dismissed loyalty as an old-fashioned concept but borrowers retained until we introduced the Moneygram service in 1987 allowing them to shop around all the banks likely to lend to them. This simple process put some competition into the borrowing business and made the banks sharpen their pencils and offer the best deals possible. Banks will not offer a good deal to a customer regardless of how long that customer has been with them unless there is competition for that customer’s business. That is why borrowers should always approach a number of banks for their loans and play one of against the other until they get the best terms possible. If they don’t have the time to do, that they are welcome to engage GBAC to help them.
Defence against debt disasters
The time for borrowers to prevent disasters with their loans is not when the disaster arrives and they cannot meet payments. It is at the time they are applying for the loan when they are in a good position to negotiate a contract that will be affordable and that will have provisions in it for how unexpected emergencies will be catered for. In my Chartered Accountancy practice long before I decided to specialise in all aspects of small business and farm borrowings, I took care to see that there were safeguards in loan contracts my client signed to cope with the unexpected. In business and farming one can be absolutely certain that bad times will come at the most inconvenient moments. For the business or farm owner who does as we suggest and approaches a number of banks then takes a loan from the one who offered the best deal, there will always be another bank who competed for the loan but did not get it. If some years later relationships deteriorate with the bank whose loan was accepted, the unsuccessful bank will often be a prime candidate for re-finance.
Credit rating is performance based
Borrowers often think they have been “black-listed” by banks for past failures, but that is generally not the case. Banks simply want to be paid interest and loan repayments at the time agreed, nothing more. That is what they consider when looking at a good loan application, not whether the borrower has offended one of their competitors in the past.
I have only spoken of banks and I know the Small Business Commissioner was speaking about the raft of new lenders who have come into the market. The reason I have only dealt with bank lenders is that, dishonest and ruthless as I have seen many banks to be over the years, what you can be assured of if you borrow from a bank is that it is unlikely to send someone out to break your legs or threaten your children if the loan is not paid on time. It always seems to me to be important to work out just who it is that a person owes money to. The reason many banks behave badly is because many borrowers take money on the basis of signing an agreement to repay it at a certain time but failed to do so. Some people who lend money without checking too much on the ability of the borrower to repay, have very unpleasant ways of collecting the debts. The term “borrower beware” is worth keeping in mind.