The paperwork needed to support a loan application

Financial institutions try to assess whether an applicant can meet their repayments and the degree to which the repayments can be met under a number of different stress factors

Lending institutions have become more demanding in terms of paperwork needed to support loan applications.  File Picture.  

Over the last decade or so, since the financial crash of 2009, lending institutions have become more demanding in terms of paperwork needed to support loan applications.

Typically, in assessing any lending application of substance, the financial institution will request three years’ accounts, and potentially three years of income tax returns and confirmation that the applicant’s tax affairs are in order.

For more complicated and larger loan applications, additional information might be sought, such as ICBF reports, EBI report,, milk statements, and business plans.

Looking for historic accounting records is useful in terms of assessing what level of profit the current business is making, and more importantly the amount of income which was taken to fund drawings and income tax payments, as well as details of the amount of credit already extended to the applicant.

The advantage for the bank of having the accounts and the income tax returns to hand in assessing a loan application is that figures can be cross compared and validated, giving greater assurance. Secondly the income tax returns contain extra information, such as the amount of stock relief claimed, and capital allowances or losses forward which may be subduing the income tax position for the years in question.

Ultimately, financial institutions try to assess whether an applicant can meet their repayments, and more correctly, the degree to which that person can meet their repayments under a number of different stress factors.

For instance, when lending to dairy farmers, banks and credit unions may stress test applications assuming a base milk price of 28c a litre.

This involves recalculating previous year’s profits as if the milk price for those years was 28c, and assessing if the individual could have met their drawings, existing repayments, and proposed payments, at that level of milk price.

Presenting a comprehensive business plan can really make a difference, when it comes to getting application approval. Of course, it’s pretty obvious that a farmer seeking funding is looking to make the investment in order to improve their business. Improvements to a farm business might come in the form of extra productivity, such as a stocking loan to buy additional cows for extra land rented.

On-farm investment might result in reduced costs. For example, a slatted shed should result in less straw bedding. Whatever your proposed investment is, unless your repayment capacity is blatantly obvious, then supporting your business loan application with a business plan will help your lender understand how and why your investment proposal makes sense.

A comprehensive plan will detail the existing resources of the farm including stock (by age and type), the machinery on hand, entitlements owned, land owned and land rented, together with details of the tenure of that rental land (long term lease or conacre).

The plan will also detail existing repayments and the remaining term.

It is useful to outline any capital expenditure which has been funded in recent years from cash flow, as well as detailing any loans which have been cleared during that time, this information will point to additional repayment capacity coming on stream, and demonstrate that your business has had the capacity to meet expenditure above and beyond the drawings, tax and loan repayments made.

Of course, full details of the proposed investment, such as total costs, VAT recoverable, grants receivable, if any, and amount of own deposit or trade-in to be applied is useful in ascertaining the amount of funding and whether bridging funding is needed and the duration of such funding.

Mapping out historic profit levels for the past number of years and adding projections of where the profits are likely to go, together with projections on tax, drawings and existing and new repayments, presented as a table of financial information, is without doubt the single most important element that can be stitched into a business plan, this is called a cash flow projection.

In a more complex lending application, a variety of projections can be presented which incorporate stress testing for increased interest rates and perhaps milk price, or beef price in the case of cattle farmers.

A business plan can also incorporate details of other income streams, such as rental income, off-farm employment, and outline details of assets which can be disposed of to create liquidity if needed, as well the security being offered, if any.

At the end of the day, financial institutions are in the business of lending money, but also in the business of collecting what’s owing to them.

In assessing any loan application, the lender
will want a high degree of surety that repayments can be made.