It might not be a good as you think!
Did you know that every bank gives all clients a rating? This rating is used to determine the risk you pose to the bank. The higher the risk, the more capital they are required to hold in the event your debt was to ‘go bad’. Keeping this capital aside costs the bank money, to a point where they often don’t want your business because it is no longer profitable to them.
The problem is that we can’t see this. We just see how much interest we have paid……which makes us feel like we must be an asset to them! Often we don’t find out that we are a high risk until something goes wrong and the bank seems to be doing everything they can to wind up our loans for what seems like no good reason.
If all appears to be well between you and your bank at the moment then it is probably a good time to check that you really are a model client….just in case you need to ask them for something in the future.
Assuming you are making all repayments in full and on time, the only thing left to check, which usually gets forgotten, are the covenants on your loan.
Covenants are things you agreed to do when you entered into the loan and will be detailed in the loan agreement. Many of us don’t realise we agreed to these because at the time all we were worried about was getting the finance and buying whatever asset we were purchasing at the time.
Some of the most common covenants with banks are:
- A minimum amount your business must turnover each year
- The requirement to provide the bank with a copy of your financials by a certain date annually, quarterly or monthly
- A minimum Loan to Value Ratio (LVR). If the value of your asset has dropped if may affect this ratio.
- An Interest Service Coverage Ratio (ISCR). This is a measure of your ability to meet interest repayments.
The covenants are agreed to at the time the loan is entered into, and can include almost anything. The only way to check is to review your original loan documents, or to ask the bank.
Keeping a list of your covenants handy and making sure you meet them each year will ensure you keep your rating, and your relationship with your bank, as good as possible.
Next time you are taking out a loan, don’t forget to negotiate on the covenants like you would on the interest rate. They may not seem like much at the time you are entering into the loan, but reducing the requirement to provide financials annually rather than quarterly can save your time and cost every year.
If you need a hand with this give us a call and we can help you work out where you stand.