If it doesn’t work with the big banks, ask the smaller ones for a loan

The entrepreneur, director of a family business, writes that banks are conservative when deciding whether to finance a business project and cites an example from his experience. Although he has resolved all credit obligations on time, some even earlier, two years ago, due to a decline in profitability, he was denied a loan.

The financing problem began when he decided to purchase land across from the current location for business expansion (the company is engaged in the import and sale of commercial vehicles, machinery, and cars), making parking space a crucial resource for the business. He sought a long-term loan as it is a long-term investment that is healthiest to finance from long-term sources, but the banks, he writes, flatly rejected him with the explanation that he was buying land on which he does not plan to build anything. Nevertheless, it was an opportunity, so he purchased the land from current liquidity.

In the meantime, he experienced unexpected losses in business, and the business year 2023 ended with low profitability, but the company duly fulfilled all credit obligations and there were no delays. In the middle of last year, a ‘financial monitoring framework’ (like when a company has an approved overdraft that usually must be closed within a year but can be renewed) that he had contracted with the bank was due. He requested a deferral of that obligation by sending the bank an explanation of the reasons for the decline in profitability.

Can but cannot

The bank verbally informed him that the ‘framework’ (i.e., overdraft) would most likely be extended. But after a few days, shock – they called him to inform him that the financial monitoring framework would not be extended and that he must immediately repay the entire amount or reprogram that obligation with a five-year loan secured by real estate or a cash deposit of at least thirty percent. He immediately agreed to the reprogramming and collateral on the property, but a new surprise followed. Namely, the bank deducted forty percent of his financial obligation from his account, and for the remaining debt repayment, they proposed a reprogramming over three years with collateral on two properties. He says he was furious, but he couldn’t resolve anything, so he turned to some other banks. But unsuccessfully. He claims that despite everything, the business year 2024 was better, and he negotiated with the banks, but everything was progressing terribly slowly. He offered them another property as collateral for a loan that would consolidate all obligations and thus relieve his repayment capacity and create conditions for accumulating the funds needed for liquidity. As all this took a long time, due to the current tax debt that had accumulated, his account was blocked on the day the bank’s risk department sent him final questions for processing the loan (after more than forty days from submitting the application). Although the company was unblocked within five days (counting weekends), after that, all prospects went down the drain.

And the small banks?

Of course, here it would be necessary to delve a little deeper into the details of this story. I spoke with a banker who says that banks have an obligation under the International Financial Reporting Standard (IFRS 9) for a company that is experiencing difficulties and wants an extension, to increase reserves. This is an additional cost for them, and large banks simply do not want to deal with it. If he had sought a loan from smaller banks, some of them would likely have considered it, but they would certainly analyze why profitability has declined and whether it is related to one year or if a decline can be expected over several years. They could also analyze whether they need to increase reserves due to potentially critical operations. If they do not have to, while simultaneously not violating IFRS 9, then there is hope.

In any case, I cannot conclude without additional information that the banks acted incorrectly, but I advise the entrepreneur to try to obtain a loan from smaller banks.

POST SCRIPTUM

The entrepreneur writes that from experience he asserts that in Croatia, unlike in developed EU countries, the biggest problem of low profitability of companies is the unwillingness of banks to provide quick and adaptable financing for entrepreneurship. – Often, the opinions of the risk departments of our banks are overly conservative and unrealistic, seeing danger in everything. There is too much looking back and too little looking forward. I understand the position of the banks, but I do not understand that it is a risk for them to refinance all obligations with one long-term loan, with collateral of double the value, to a client who regularly meets all obligations and has not had repayment issues until then – concludes the entrepreneur.