One of the major challenges militating against business owners from approaching their bank for Loans is how to package their businesses for bank loans.
It is pertinent to note that banks wants to lend because lending is their major Income source. They are however very careful and will only lend to businesses that have proven ability to perform and pay back the loans.
Bank Loans are depositors fund that must be accounted for when depositors come calling for them.
Again bad debt are double holes in bank books because bad loans are funds yet to be recovered from borrowers and have to be provided for by debiting the banks’ income from other sources in other to clean the their books at financial reporting intervals.
In a previous article we discussed the questions a loan officer will ask you with the 4 HOWS OF CREDIT. In this article we will attempt to explain how to package your business for bank loans with 6 Cs of credit.
- Character – Character is the single most important factor in bank lending. Although it is a highly subjective evaluation of the customers reputation, the bank must believe that the customer is a trustworthy and reliable individual that can be depended upon to return depositors’ fund given to him in form of loan. Some of the things the bank look out for are: Personal and Company credit history. Read: HOW NOT TO RUIN YOUR CREDIT HISTORY; Account performance and history. Question like: Has the customer issued DUD cheques before? Has the customer’s account slide into debit position without an overdraft in place and as a result of bank charges before? and how many times? Does the bank have the current address and other recent information on the customer?. Read: YOUR RIGHT AND RESPONSIBILITY AS A BANK CUSTOMER. For more; Educational background, work experience and age of customer (If the prime movers of the business are old, are there succession plans in place?) are other pointers to the characters of the intending borrower.
- Collateral – Collaterals are fall back options for banks when they are required for bank loan, they are secondary repayment options for bank loan and are not a very major factor in lending. Collaterals are expected to put the borrowers on the edge and to ensure that the loan is paid back because if not, he may loose something very dear to him. Collaterals such as Landed properties, Machineries, Account receivables, Inventories, including cash deposits and other valuable business assets are taken by banks. Collateral types depends on loan types and banks preferences.
- Condition – This refers to the general environmental and economic factor around the customer and his business. The industry the customer operates and the bank loan purpose is evaluated. Is the customer requesting for a loan to increase its capacity to produce bathing soaps at a period when government have just allowed the importation of bathing soaps? or does he want to increase its fleets of transport buses in a route where the government is currently constructing a Bus Rapid Transport (BRT) lanes and so on. The customers competitors and what they are doing is also evaluated to know if the customer is in touch with happenings in his industry or he is looking to invest in obsolete technologies when his competitors are far ahead. Size of the customer’s operating industry, the customers market and its share of the market is also a factor, the customer suppliers and their strength and other economics and political factors that could affect the customer business are also evaluated.
- Capital – As an intending borrower, you must have had your funds invested in the business before you approach your bank for funding. You must have tested the business venture with your funds, learn from mistake you must have made and make some success of the experience. Most lender don’t fund start-ups or/and 100% of business ventures. The business owner is expected to contribute about 30% of the cost of the venture while the bank does 70%. The fund you have invested in the business and the knowledge you must have mopped up running the business from scratch all form your capital.
- Capacity – This is another very important aspect of credit evaluation. It show the intending borrower’s ability to repay the loan. All lenders are more interested in the source of repayment and its ability to meet repayment deadline than they are interested in collateral and other Cs apart from the borrowers character. Some of the ways of evaluating capacity includes: existing and projected cash flow, Payment history of previous loan/s if any, How geared the borrower is and availability of other source of repayment in case the primary source failed.
- Confidence – This C evaluates how confidence the customer is about his business. This is reflected in the business plan and the customer’s interpersonal relations. A professionally written business plan that takes good care of customers capacity, made mention of the customer’s character, explain the customer’s business condition and detailed how it is ripe to lend to him and now. The plan that also explain the collateral and also detailed the alternative repayment source/s and also made mention of the level of prime mover’s involvement and the much that have been invested in the business will surely communicate positively and give the lender some level of confidence about the intending borrower.Your stakeholder management skills, ability to convince the bank officials during your loan interview and your rapport with bank officials especially the loan officer/s may also aid your request by giving some level of confidence to the bank officials.