Commercial lending is rarely assessed on one number alone.
A strong asset, profitable business or experienced borrower may form part of a compelling proposition, but each needs to be understood in the context of the wider transaction.
At Henry Dannell, our approach to commercial lending begins with a credit mindset.
Before considering where a case may be placed, we look at how a lender is likely to interpret it: where the underlying strengths sit, which areas are likely to attract scrutiny and whether the proposed debt structure is supported by the fundamentals of the transaction.
Starting With The Purpose Of The Debt
One of the first questions is also one of the simplest: why is the client borrowing?
Acquisition, refinancing, capital expenditure, business expansion and liquidity requirements can each present a different credit profile.
Understanding the purpose of the facility helps establish whether the proposed debt is appropriate for what the client is trying to achieve and, importantly, how it is expected to be serviced and repaid.
From there, the analysis becomes more detailed.
Assessing The Ability To Service The Debt
Headline turnover or asset value can provide useful context, but neither necessarily demonstrates an ability to support borrowing.
We look more closely at the underlying financial position.
That can include historic and current trading performance, EBITDA, cash generation, existing debt obligations, interest cover, leverage and the sustainability of earnings.
Where performance has changed, the direction of travel matters too.
A weaker year may require explanation rather than automatically making a transaction unworkable. Equally, a particularly strong year needs to be understood before it is treated as representative of future performance.
The objective is to establish what the numbers are actually telling us.
Understanding The Asset
Where property forms the security, loan-to-value is an important consideration, but it is not the entire credit assessment.
We also consider the nature and quality of the asset, its location, current use, tenancy profile where relevant and the strength of the underlying valuation proposition.
A lender is ultimately considering both sides of the transaction: the borrower’s capacity to service the facility and the security supporting it.
Those two elements need to make sense together.
Looking Behind The Borrower
Commercial lending can become more nuanced where ownership structures, multiple businesses or different sources of wealth are involved.
Our analysis therefore extends beyond the borrowing entity itself.
Who ultimately owns and controls the business? What experience do they have? What other liabilities exist? Is additional liquidity available? Are there connected companies or assets that materially change the overall picture?
Understanding the wider position can provide context that is not immediately apparent from a set of accounts alone.
Stress-Testing The Proposition
A credit assessment should not only consider whether a transaction works today.
It should also consider what happens if circumstances change.
What happens if interest costs increase? If revenue falls? If a tenant leaves? If an exit takes longer than anticipated?
Identifying those sensitivities early allows us to understand where the transaction has resilience and where additional explanation, evidence or structuring may be required.
Presenting The Complete Credit Story
Ultimately, good commercial lending advice is not about finding a lender prepared to accept a set of numbers.
It is about understanding the transaction sufficiently well to present a coherent credit proposition.
At Henry Dannell, that means analysing the purpose of the borrowing, cash flow, leverage, security, ownership structure and repayment strategy before considering how the opportunity should be positioned within the lending market.
Because complex commercial transactions rarely become straightforward by simplifying the numbers.
They become clearer by understanding what sits behind them.
If you are advising a client on a commercial transaction and would value an early credit view, speak to Henry Dannell. We can assess the lending proposition and work alongside you to determine how it may be structured for the market.
rather than as an isolated transaction.
This content is for general information only and does not constitute personal financial, investment, legal or tax advice. Valuations, lending values, pricing, fees, leverage and security requirements are indicative only and remain subject to lender assessment, independent valuation, asset composition, due diligence, credit approval and market conditions.
