A private lender assessing a commercial facility works through four areaswhen deciding whether to provide a loan facility: the exit, the security,serviceability, and the borrower's disclosure record.

Assessment moves between each area as information arrives, and a questionraised in one area usually sends the analyst back into another. Strength in one does not compensate for a failure in another, and a file with excellent security and no exit won’t be approved on the strength of the security alone.

The Exit

The exit is the mechanism by which the facility is repaid. There are four recognised categories:

  • refinance to a bank or  another lender
  • sale of the secured asset, or of another asset
  • completion of a project that generates sale or lease proceeds
  • amortisation from operating cash flow

Credit assessment tests whether the exit is documented, dated and achievable on the facility's own terms.

A refinance exit requires the borrower's projected credit profile to meet the incoming lender's parameters at the relevant date, not today's. A sale exit requires an asset that can be sold inside the term, at a value that clears the debt after costs.

A facility with no defined exit depends on conditions continuing topermit repayment. Lenders applying credit discipline decline those, irrespective of security coverage.

Security - Real Property

The leverage bands most often quoted are real property bands, and within that class the analysis turns on the depth of the buyer pool, whether the asset holds its value under stress, and whether the income supporting it isverifiable. Standard commercial and industrial property in establishedlocations sits at the top of the range, particularly where it is let to soundtenants on continuing leases, because a Receiver selling into that market isselling an asset that a large number of buyers already understand and canfinance at short notice. Materially lower leverage applies where realisation is slower and less certain, which covers specialised premises built for a single occupier, niche land holdings, assets that require approvals or remediationbefore they can reach their logical buyer, and partially complete developments where the purchaser is acquiring a construction problem along with the asset.

The valuation figure is only part of the assessment, because the instructions given to the valuer, the assumptions the valuation rests on and the reliance rights attaching to it all bear on whether that figure means anything in the lender's hands, and a valuation prepared on assumptions that do not match the lending scenario provides limited protection whatever the numberon the front page says.

Security - Non-Real Property Assets

Where the security package extends beyond real property, it is taken by general security agreement and registered on the PPSR rather than by mortgage, and both the value and the enforcement path change accordingly.

Plant and equipment is assessed against the secondhand and auction market rather than replacement cost or book value, and the gap between those figures is usually wide enough to determine whether the asset is worth taking at all. The questions that follow are whether the equipment is already subject to prior finance or retention of title, whether it has become a fixture and therefore belongs to the landlord or the mortgagee rather than to the borrower, and what it costs to remove, transport and store while a buyer is found. Specialised or purpose built equipment attracts the lowest leverage of any secured class, because the pool of buyers who want it is often the same small group of operators the borrower was competing against.

Debtor ledgers can support real value, but the value sits in thecomposition rather than the total, so assessment looks at concentration among the largest debtors, the ageing profile, the incidence of set-off and contra arrangements, and whether the underlying contracts allow the customer to withhold payment on retention or disputed progress claims. Inventory rarely supports meaningful leverage, because stock realised out of a failed business sells into a market that knows exactly why it is available.

Shares and units in private entities are taken for control rather than for value, since there is no ready market for a parcel in a private company and enforcement means offering an interest in a business whose performance depended on the person being enforced against. Goodwill and going concern value are assessed on the same basis, which is that most of it disappears at the moment enforcement becomes public.

Guarantees, whether corporate or personal, are a covenant to pay andtheir worth is the assets standing behind them, which is why a guarantee is only credit support to the extent the guarantor's position has itself been searched and verified.

The Disclosure Record

Searches are ordered at the outset and resolve most files within hours of instruction:

  • title searches: disclosing existing mortgages, caveats and encumbrances
  • PPSR searches: disclosing registered security interests over company assets
  • ASIC extracts: confirming directorships, share structure and any strike-off action
  • litigation a judgment searches: disclosing proceedings affecting the borrower or the security
  • credit reporting and tax portal records: disclosing payment conduct across commercial andstatutory obligations

Undisclosed caveats, tax arrears and related party arrangements found through these searches, after a borrower has represented otherwise, typically end the assessment. Not because the item itself is always fatal, but because the analysis in every other area depends on the reliability of what the borrower has said.

Serviceability

Standardised bank calculators apply fixed assumptions that understate capacity for businesses with seasonal, project based or transitional cash flow. Applied to those borrowers, the output is wrong before the analysis starts.

Assessment instead looks at whether the actual cash flows service the facility across its term, including capitalised interest where the structure provides for it. The evidence is management accounts, contracts and debtor ledgers. A second question runs alongside it: whether the funding purpose isconsistent with the financial history presented.

What Actually Sets The Timeline

Credit assessment timeline is driven by the completeness of the information supplied and not necessarily by the complexity of the transaction.

A file containing current financials, a defined funding request, disclosed adverse history and a documented exit can move to indicative terms within a relatively short timeframe, because each area of assessment already has the material it needs. A complicated deal with a complete and detailed file provided by the borrower moves faster than a simple one submitted in pieces. Afile supplied in fragments extends by the interval between each request and the response to it.

The questions a private credit team will ask are consistent across transactions. The business loan application timeline mostly reflects how much of that material was assembled before submission.

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