CAMPARI PART IV – “P” is for PURPOSE

If you just joined the series, click here to read the Introduction to the CAMPARI framework.

The next aspect to be considered under CAMPARI is the purpose of the loan or overdraft – what will it be used to finance? The Bank is more willing to support a request if the purpose is right for both them and the business.

 

Is It Legal?

Obviously the Bank does not want to finance an illegal business! A request to provide an overdraft facility to allow the business to purchase some drugs which can then be sold for 100% profit won’t meet the Bank’s criteria!

Similarly, anything, which helps to avoid payment of taxes, will not be considered as a plus point in the assessment process. Of course there are legal loopholes (which are slowly being closed!) that help avoid taxes and there are those that are plain illegal – how the bank will view the legal route is down to the Manager you deal with. It will be a matter of his personal ethics coming into play.

 

Does It Fit With The Bank’s Lending Policy?

Banks have business sectors that they like and sectors which they are not particularly keen on. Sectors may be out of favour for a number of reasons:

  • In a standard economic cycle, certain sectors may suffer more than others, thereby increasing the risk of lending
  • The Bank may already be heavily exposed to a particular sector and so vulnerable if there is a downturn.

When assessing your request, the sector you are in will be reviewed and then a decision given as to whether this is a strength or weakness. If the Bank’s current Policy for the sector you are in is a very strong anti-feeling, then your request may stop there. Regardless of who you are, as a matter of policy, the answer will be no. Your only options are either to wait for the Policy to be lifted or to seek finance elsewhere.

 

What Will The Finance Be Used For?

If the funds are to be used for working capital or to purchase a fixed asset, that’s fine and it’s a plus point. However, if the loan or overdraft is to be used to pay off a debt with another financial institution, then the application will be viewed slightly differently. The questions asked are, “Why is the business looking to repay its debt? Is the other Bank demanding its money back? Do they feel uncomfortable with the business’ future prospects?”

The answer may simply be that the existing Bank is proving to be too costly and the business is looking to reduce costs. Alternatively the business may be looking to move because the level of service is poor. In both cases the reasons are acceptable.

Remember what I said earlier, the Bank is not a substitute for risk capital. If your idea is for a new and innovative way of doing something, but it’s very experimental and requires money to build a prototype, then Bank finance is not for you. If you wish to take your chances by all mean have a go but during the assessment process you are unlikely to score very highly.

 

Can The Purpose Be Proved?

It’s not unknown for a business to ask for a loan to buy a vehicle for example and then use the money for another purpose, something the Bank wouldn’t want them to use their money for, such as paying off other debts. If the Manager can satisfy himself that the cash will be used for the right reason then this will help your case.

Proof could be in the form of a written quotation or other correspondence, which demonstrates that a deal is being put together. This is fine if you are buying a capital item such as machinery or vehicles but it’s more difficult if you are requesting an overdraft facility for working capital. Of course, anyone can get quotations and at the end of the day, its down to how the Manager views your integrity and honesty – does he believe you!

Something, which may help is a tour around the business. If the Manager can see the business in operation, see where the new machine will go, and understand how it fits in with the rest of the business, then this will go some way to satisfying him and help him understand that the purpose of the request is a sound one.

 

Is The Request Structured Correctly – Overdraft or Loan?

I have mentioned a few times the importance of structuring your borrowing correctly. A request for help with working capital would invariably be financed via an overdraft, whereas the purchase of a capital item would be financed by loan.

If your account has an overdraft limit, the balance of that account should be swinging between credit and debit sometime during a month. All an overdraft is doing is allowing you to pay your creditors and buy in more stock, before you collect your payments from debtors. An overdraft therefore should not be used to finance a piece of equipment, which will be used by the business for say 5 years; this would be better placed on a loan or financed via a leasing arrangement.

Another way to finance the day-to-day requirements of the business are to utilise Invoice Discounting or Factoring. These products are used for medium-sized businesses but are an alternative to the traditional overdraft.

If the request is not going to be correctly structured then this would be a weakness, but it’s something that is easily put right by choosing the right product.

 

Is It The Right Thing To Do For The Business?

There are instances where a business is already heavily borrowed and it may not be in their best interests to borrow additional money. This could be because existing loan repayments or interest costs are already proving to be a strain and borrowing more may not be the right move. In any economic downturn a business, which is heavily borrowed, could suffer more than a business which has no borrowings, or very little – profits could fall but the same interest costs or loan repayments have to be covered. Banks are always a pessimistic lot and will try to assess all the possible downsides and risks!

Trying to tell someone that they are already borrowing too much and that another loan may not be in their best interest is not easy – the owner is keen to get on with it and usually won’t hear the Manager’s words of caution! Banks may be accused of stifling entrepreneurs, and that could be the case, but they are also there to help temper your enthusiasm.

If you are faced with this reluctance, listen to what is being said, evaluate it and then make a reasoned decision as to the way forward – do you take his advice or storm out and go somewhere else? Ask what the Manager sees in your business that he doesn’t like so you specifically know and understand the areas of his concern.

To your success!

Olanrewaju Oniyitan






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