Pre-lending Review

A business case of how the dVT Group were asked to carry out a pre-lending review to determine whether funds should be advanced to a small mining services provider.


As part of our normal engagement with financiers, the dVT Group were asked to carry out a pre-lending review on a small mining services provider, with a request to provide an opinion as to whether funds should be advanced to the company.


In a pre-lending review, especially for the level and type of debt sought as here, companies are often in a poor cash flow position, and so focus is not only on documentation and customer profiling, but also on outstanding liabilities and cash flow pressures and the likelihood that the business is viable going

dVT uncovered a number of concerns with the company’s operations and processes. The company had been making trading losses for a couple of years and this appeared to be because of work done at lower margins than required to cover all costs. This is not unusual in highly competitive sectors, but of course, is not a healthy position to start from. Because of these losses, the company was behind in its statutory liabilities, i.e. for superannuation, PAYG and GST, and this led to the company requiring the finance in
order to repay those liabilities.

The problem then becomes, how do you repay the loan?

The company had made significant improvements over the past few months and was showing a small profit; however there was little evidence that the company could generate the profits needed not only to repay the loan within a reasonable time frame, but also to provide its ongoing working capital needs. Since the company had increased its turnover in the last 12 months, it had also increased its working capital needs, so the problem seemed likely to escalate rather than be resolved.


While the company was able to tick the boxes in terms of documentation and processes, it still had a fundamental problem – could it ever repay any loan received without liquidating the business? We recommended to the financier that they do not proceed with the loan application on that basis. The loan was in fact advanced, and the company went into liquidation some 18 months after. The finance company was paid out, but the business ceased and creditors lost their money.


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