Negotiating with Banks

The Conditions of the Loan

In bank–company relations, the time comes for what could be called “the moment of truth,”
which is when the company asks for financing. A loan may be aimed at the company’s growth,
or its survival, or with it having alternative sources of financing.

There are five phases prior to a loan being granted:

● Previous mutual knowledge between the company and the bank
● Preparation of the application
● Negotiation
● The bank’s decision
● Upkeep of the relationship

How does a bank grant a loan?

-- The criteria banks use in their decision-making process are both quantitative and qualitative,
and when studying an operation, three aspects are analyzed: the operation requested, the
capacity for payment, and the guarantees provided.

● Operation: What is the purpose of the operation, what amount has been requested,
what is the timeframe for the company to pay back the money, and what is the specific
bank product? In this respect, the bank will also ask the company whether it will
contribute any of its net equity to the project.

● Capacity for payment: The proposed operation must have the capacity to be paid back,
it must be profitable, and it must show profits so the instalments can be paid within the
initial time frame.

● Guarantees: Guarantees measure the company’s solvency and can be either personal or
real (mortgage, collateral, guarantors, etc.). Their goal is to mitigate the risk of the
operation, and if the financing cannot be repaid, they can be cashed in to pay back the
loan.

Risk Analysis Methods

We call the different ways that banks process the information obtained on an operation and its
application risk analysis models.

The classification of these models, according to the use-capacity-solvency rule for risk criteria,
would be: credit scoring for private customers and credit rating for companies.

Credit score model. This is a credit rating system that automates decision making via a set of
data on the person, the company, and the operation. A wide range of variables are borne in
mind in the credit score model, but they can be grouped into four categories:
 ● Qualitative: employment, kind of contract, seniority at the job, and number of people
Supervised.
● Quantitative: income (fixed or variable), expenses (home, car, credit cards, etc.), assets
(home, property, financial positions, etc.) and debt (mortgage and loans).
● Behavioral and relational: credit information filters (Unpaid Loans Registry, ASNEF,
Equifax, etc.), association with the entity, and behavior in the current account, payment
of loans with the bank, etc.
● Operation: amount requested, repayment calendar, product requested.

(NOTE: The risk evaluation will be based on the risk profile and ability to pay.)