Business Loan Annual Review

You can avoid that pesky annual loan review!

If you currently have a business loan, you know the frustration of having to prepare for a business loan annual review.

Among other things, you need to provide up-to-date financials for your business, which can be difficult especially if you don’t have an accountant to help or you’re using a strategy to reduce your taxable income.

Luckily, there are lenders who take a more common sense approach to annual reviews and you may even be able to avoid them completely.

How to dodge a business loan annual review

Although the process is simple enough, a business loan annual review can be a nerve-wracking experience especially if you had a bad year.

The banks are always risk-averse and don’t see the same goodwill in your business as you do.

They give you an umbrella when it’s sunny but can just as quickly take it away when it’s raining!

Preparing for a review can also be costly and time-consuming too but, depending on your loan amount and the lender, you may be able to skip it altogether.

How does a business loan review work?

As the name suggests, the reviews for business loans are conducted yearly and they’re basically a financial health check of your business to make sure that you can continue servicing your debt.

The bank will usually send an email (although it’s usually a legal requirement to send a letter) telling you that your annual review is coming up and will ask you to send through your latest business financials:

• Accountant-prepared profit and loss statement (P&L) and balance sheet showing your profits, assets and liabilities for the past financial year.
• They may ask for your latest business activity statement (BAS).
• Your latest personal income tax return (only needed if you’re a sole trader operating under your own name).
• Your latest Australian Taxation Office (ATO) tax portal (this statement shows that your taxes have been paid on time. If they haven’t, it’ll show interest charged and it may be an indication that the business is in financial trouble or being mismanaged).

Along with these financials, the lender will take into consideration your current repayment history with the bank including missed payments and arrears and they may also provide general comments about the risks in the sector in which your business is operating.

Generally speaking, the review can take anywhere between 2-3 days.

Here’s how you can avoid a business loan review altogether

Keep your loan under $1 million

As a general rule, business loans for under $1 million typically fall within some lender’s small and medium-sized enterprise (SME) department.

These lenders have essentially decided that there’s too much work and cost involved in reviewing such a small loan facility and will waive the need for an annual review. These small loan amounts are generally set and forget.

This is great news if you just need to buy a motor vehicle, plant and machinery or equipment.

Keep your LVR low

Business loans that are for less than 50% of the value of the property that you’re using as security (Loan to Value Ratio) may also help you to avoid annual reviews.

The reason is that the bank is essentially taking on less risk so they’re happy to waive reviews.

Show a strong cash flow and business case

If you can provide an accountant-certified business plan showing cash flow projections as well as evidence of successfully running a similar-sized venture in the past, you may be in a position to negotiate on the need for a business loan annual review.

Sometimes it may just be a case of successfully running your business, meeting your financial commitments and making your business loan repayments for 2-3 years, after which, you can request to remove the need for a review.

Your mortgage broker can negotiate on your behalf!

They understand that banks would rather keep a strong business client then lose them to another bank and the mortgage broker will even help you negotiate a better interest rate on a regular basis.

Maintain a solid repayment history

This goes hand in hand with putting forward a strong business case.

Commercial loans and business finance are all about building your character as a borrower.

If you can show evidence of a strong repayment history of any current or recent loans in your name, including personal loans and a mortgage, it can work in your favour.

Avoid the annoying paperwork and focus on running your business!

If you want to avoid annual reviews, call us on 1300 889 743 or complete our free assessment form and we can help find a solution.

Will I be charged a higher interest rate?

No and you won’t be charged additional charges like a risk fee either.

By waiving the need for an annual review, the bank is essentially saying that you’re a less risky applicant.

What are the other benefits of no annual reviews?

If you don’t currently have a business loan, you may not fully understand the pain that can come with annual reviews.

With no annual reviews attached to your business loan you can:

• Avoid time-consuming intrusions: While you’re trying to run your own business or a company, any time wasted is time that could be better spent turning a profit. It take anywhere between 2-3 days to get all of the requested documents ready for a lender!
• Save on the costs of an accountant: The P&L and balance sheet you provide will need to approved by your accountant, which will come at a cost to your business.
• Not have to worry about your tax returns: Many businesses can be late with their tax returns – this isn’t a new thing but most banks simply don’t get it. With no reviews, you can avoid the headache of having to be on top of your business tax return every year and even continue with any income-lowering strategies that you’re using to reduce your income tax.

How can we help?

We’re business loan experts. with almost 40 lenders to choose from including major banks and non-bank lenders that specialise in business finance.

Call us on 1300 889 743 or fill in our online enquiry form so we can assess your situation and finance needs and negotiate a business loan that works best for you.

Business loan annual review FAQs

Although banks take annual business loan reviews pretty seriously, the policies and processes around commercial loans can be quite grey. Almost everything is negotiable!

In saying that, it’s important to understand what exactly happens when a bank downgrades the risk rating of your business.

What happens if I ‘pass’ the review?

If the bank is happy with your business health check, the best case scenario is that you don’t hear back from them for another year.

Of course, reviews and repricing can take place at any time the lender sees fit, particularly if you work in a fluctuating sector like agriculture or manufacturing.

What happens if I ‘fail?’

If you’re financials aren’t quite up to scratch, some lenders aren’t quite exactly forgiving when it comes to the reasons why.

Sometimes you just have a bad year due to ill health or other personal issues.

Fortunately, the bank generally wants to work with its business customers to stop them from refinancing to another lender. As such, you may expect to go through the following:

• They may give you a warning: Sometimes a bank will “give you a pass” but they will tell that you need to improve the financial position of the business by next review.
• The review might be brought forward: Instead of waiting till the following year, the bank may look to do another review in 3-6 months and may even specify financial benchmarks or covenants that the business will have to hit or action in that time.
• 3-6 months grace: In situations where you don’t quite have your financials in order, some banks can give you 3 months to provide this information. In some cases, they give you up to 6 months leeway with approval from a credit manager.
• They can re-price your loan: This includes charging you a higher interest rate, which is usually sign that you should refinance to another bank.

What if I have a fixed rate business loan?

It’s possible to fix your interest rate for up to 10 years with a business loan or up to 30 years with a residential property as security.

What this means is that the bank won’t be able to increase your interest rate if they see that your situation has become a higher risk.

Despite this, they can still revalue your business in relation to the risks they see in the industry and may require you to pay down your loan to a lower LVR or put up more security for the business loan.

This happens all of the time and it usually means it’s time to contact your broker and refinance.

What if I have a fixed rate business loan?

It’s possible to fix your interest rate for up to 10 years with a business loan or up to 30 years with a residential property as security.

What this means is that the bank won’t be able to increase your interest rate if they see that your situation has become a higher risk.

Despite this, they can still revalue your business in relation to the risks they see in the industry and may require you to pay down your loan to a lower LVR or put up more security for the business loan.

This happens all of the time and it usually means it’s time to contact your broker and refinance.

Can I use equity to help my business?

Often business owners who have fallen on hard times just need a small business loan to cover their suppliers or unpaid client invoices.

Even if you just need $30,000-$50,000 to get your business moving again, your bank may not be willing to lend against the equity in an existing residential property that you own.

You’re already considered a risky client and they won’t generally be willing to take on any more risk.

We know many business owners that are asset-rich and we can help you borrow up to 85% of the equity in an existing property for business purposes.

If you need an equity loan for your business, complete our free assessment form and we can let you know if you qualify.

How does the bank look at the industry?

Although it forms a small part of the annual review, a macro look at the wider sector or industry in which the business operates is still important to the bank.

This is particularly true if the business is in anyway reliant on the manufacturing, resources or agribusiness sector.

For instance, if you’re a steel manufacturer or even a distributor in a regional town where steel plants are closing, your business loan may well be downgraded and the LVR lowered.

When the bank completes a risk-grading, they rely heavily on Moody’s and other credit rating data.

For each ANSIC (Australian National Security, Investigation and Collections) code, Moody’s will have a grading of the industry as either strong, medium or below average.

The banks are smart because they have the data to back it up. Pretty quickly they can see that a business is in trouble even if the owner doesn’t want to accept it.

What if I own the premises as well?

If, for instance, you’re running pub and you also own the freehold premises (the building and the land), there would still be annual review of your pub business loan (which will most likely include covenants) but there won’t necessarily be a review of the commercial property loan.

In fact, loans under $5 million for standard commercial properties come with no annual reviews at all with one of our lenders. The same goes for commercial loans with a LVR of less than 50%.

If there is an annual review, the only typical requirement is an Interest Coverage Ratio (ICR) of 1.5% along with a copy of the current lease in place.

In saying, specialised commercial properties like pubs, hotels, child care centres and medical practices may need to be revalued every 2-3 years compared to 5-10 years for standard commercial properties like warehouses, factories and offices.

If you own a specialised property, you can even be forced to do a valuation of property at your own expense. This can be anywhere between $10,000-$20,000 depending on the property.

Not all lenders have the same risk appetite for commercial properties!

You may not need to do a valuation on such a frequent basis if you choose the right lender.

Call us today

Some lenders take a more common sense approach to business loan reviews and we know who they are!

In need of a business loan to buy an existing business or to grow your own?

We have a number of business loan solutions available including equipment finance and invoice discounting.

Whatever your business loan needs are, call us 1300 889 743 today or complete our free assessment form to speak with one of our highly experienced mortgage brokers.