Business Growth: Why Australian Banks Can Get Nervous

Sales Are Growing. So Why Is the Bank Getting Nervous?

Why Can Strong Business Growth Make a Lender More Cautious?

Growing sales should be good news.

More customers, larger contracts and higher turnover usually mean the business is doing something right.

So, it can be confusing when the bank starts asking more questions just as the business seems to be performing better.

The reason is simple, lenders do not only look at how much revenue a business is generating. They also look at what that growth is doing to cashflow, debt and risk.

A business can be growing quickly and still become more difficult to fund.

That does not necessarily mean the growth is bad. It means the business may need more working capital to support the larger operation.

If sales rise substantially, the business may need to carry more stock, employ more people, pay larger supplier accounts and wait longer for larger customer invoices to be paid.

All of that can happen before the additional profit turns into cash.

This is why a lender may become more interested in your debtor ledger, cashflow forecast, overdraft utilisation and existing debt at exactly the time you are focused on increasing sales.

What Does the Bank See When Your Business Is Growing?

Business owners and lenders can look at exactly the same business and initially see two different things.

The owner may see:
Turnover up 25%
Several new customers
A strong order book
Larger contracts
Increased market share

The lender may also see:

Debtors increasing rapidly
More money tied up in stock
A working capital facility close to its limit
Additional equipment debt
Higher payroll commitments
Greater customer concentration

Neither view is necessarily wrong. The business may genuinely be stronger.

But growth can increase the amount of money that needs to be funded between spending cash and receiving it back from customers.

A wholesale client of mine is a good example.

They imported a product from overseas that gained fast traction in the local market, helped by genuine product quality and a window where competition was thin. By the time competitors tried to copy the offering, this client had already locked in the key customer relationships.

None of that growth was speculative. It was backed by solid purchase orders from repeat customers, the kind of order book most businesses would want.

But when the lender saw sales grow by 40% in twelve months, it didn't just take the good news at face value. It started a field audit, asked for more frequent financial reports and ATO statements, and requested information beyond what the facility agreement actually required.

From the lender's perspective, the sudden growth raised questions that needed answering. A business growing that quickly looks different to a credit team than it does to the owner, even when the growth is entirely sound.

From the client's side, it felt like being penalised for doing well.

The growth itself wasn't the problem. What triggered the scrutiny was that the lender had been given no context for it ahead of time, so it went looking for answers itself.

Which Growth Risks Do Lenders Look At?

One of the first areas is cash conversion.

How long does it take from spending money to receiving it back?

For a wholesaler, that might mean paying for stock, holding it, selling it and then waiting for the customer to pay.

For a manufacturer, cash may be tied up in raw materials and work in progress before an invoice can even be raised.

For labour hire, wages may be paid weekly while customers pay much later.

The longer the cycle, the more working capital the business needs as it grows.

Lenders may also look closely at customer concentration.

Winning a very large customer can be commercially attractive. But if that customer suddenly represents 30% or 40% of total revenue, the lender may ask what would happen if the contract ended or payments were delayed.

Another area is existing facility utilisation.

If the overdraft that once moved between $200,000 and $400,000 is now permanently sitting near a $400,000 limit, that tells the lender something.

The business may simply have outgrown the facility. But unless that is explained, the lender may see increasing reliance on debt.

The same applies to ATO liabilities, short-term loans or repeated requests for temporary increases.

Growth itself is not necessarily the concern.

The concern is whether the business has enough financial capacity to fund that growth safely.

How Should You Present Growth to a Lender?

Do not assume the numbers speak for themselves.

The wholesale client I mentioned earlier found that out directly. A field audit and a stack of extra reporting requests arrived before any explanation did.

If turnover has increased sharply, explain what caused it.

Was it a major new contract? New customers? An acquisition? A new location? Higher volumes from existing customers?

Then explain the cash impact.

If debtors increased to $1 million because sales increased by $5 million, show the connection.

If stock increased because the business is preparing for confirmed orders, provide the supporting information.

If additional employees have been hired to service new contracts, explain the expected revenue those employees will support.

Current financial information becomes especially important.

Annual accounts tell the lender what happened in the past. A growing business often needs to show what is happening now.

That may include:

Current management accounts
Debtor and Creditor aged ledgers
Updated cashflow forecasts
Current order book or Contracts
Updated facility requirements

This is also where receivables finance, trade finance or another working capital facility may be relevant, depending on where the cash is tied up.

The objective is not simply to ask the lender for more money.

It is to explain why the additional funding is required, what is driving it and how the business expects to repay it.

When Should You Review Funding During a Growth Period?

Ideally, before the existing facilities become tight.

If the business has just won a major contract, do not wait until wages, stock or suppliers have already absorbed the available cash before speaking to the lender.

Forecast the working capital requirement early. Ask: How much additional cash will the growth require? When will that cash leave the business? When will it return? Will the existing facilities be enough? If not, what type of finance best matches the requirement?

That gives the business far more options than trying to arrange urgent funding once the account is already under pressure.

Strong growth is not usually the problem. Poorly funded growth is.

A lender becoming more cautious does not automatically mean it does not support the business. It may simply be seeing a larger funding requirement and wanting evidence that the business understands it too.

Talk to Pfitz Financial

If your business is growing but your lender is asking more questions, it may be time to look at what that growth is doing to working capital before applying for additional finance.

At Pfitz Financial, I combine over 30 years of commercial finance experience with practical business consulting to help Australian business owners understand their cashflow, funding requirements and how a lender is likely to assess them.

I look beyond turnover and profit to understand where growth is absorbing cash and what funding structure may be appropriate.

If your business is growing and you want to make sure the finance can keep up, contact Pfitz Financial or book an appointment online.