Sme approach to banks dec 2011


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Sme approach to banks dec 2011

  1. 1. SME Approach to Banks Dec 2011 Khidr Solutions ConsultancyEst 2010 Assisting SMEs in Value Creation Renovate Enterprise Value REV ™ Up your SME
  2. 2. Bank’s PerspectiveWhat does it mean to be “bankable”? What is SME Capacity?Factors such as Time in Business, Consistency of data/figures, does Owner understand the working capital cycle and cashflows of business, clear separation of Owner’s money and company money, sound matching of funding vehicles (ST/LT), BCP, Succession plan, Risk Management practices, etc. What is SME Willingness?Factors such as Commitment to business, track record of repayments, reference letters from partners or major customers, evidence of Character, timeliness and sharing of business information, etc. Khidr Solutions December 2011 2
  3. 3. Bank’s main filter – 5 CsA method used by lenders to determine the credit worthiness of potential borrowers. The system weighs five characteristics of the borrower, attempting to gauge the chance of default. The five Cs of credit are: -Character (integrity/consistency) -Capacity (sufficient cashflow to service debt) -Capital (net worth) -Collateral (assets to secure lending) -Conditions (SME environment/economy) Khidr Solutions December 2011 3
  4. 4. How Bank’s Visualize 5Cs Conditions Collateral Capital Capacity Character Khidr Solutions December 2011 4
  5. 5. Character This is the first (general) impression you make on the potential lender or investor. The lender will form a subjective opinion as to whether or not you are sufficiently trustworthy to repay the loan, to manage the business, and/or generate a return on funds invested in your company. Your educational background and experience in business and in your industry will be reviewed. The quality of references, your background and the experience levels of key employees also will be examined. Khidr Solutions December 2011 5
  6. 6. Capacity Ability to repay is the most critical of the five factors. A lender will ask exactly how you intend to repay the loan or line of credit. A lender will consider the cash flow from the business, timing of the repayment, and probability of successful repayment of the loan. Payment history on existing credit relationships -- personal or commercial -- is also an important indicator of future payment performance. Prospective lenders will ask about your contingency plans for repayment. Khidr Solutions December 2011 6
  7. 7. Capital The money you personally have invested in the business which is an indication of how much you have at risk should the business fail. Specifically, the Net Worth on your Balance Sheet. Prospective lenders and investors will expect you to have contributed from your own assets/wealth and to be undertaking personal financial risk within the SME business before you ask them to commit any funding. Khidr Solutions December 2011 7
  8. 8. Collateral Collateral security or guarantees are usually required as additional forms of “comfort” you must provide the lender. Giving collateral means that you pledge an asset you own (such as your home, property, shares) to the lender with an agreement that it will be a secondary repayment source in case you cant repay the loan. A guarantee is just that -- someone else signs a guarantee document promising to repay the loan if you cant. Some lenders may require a guarantee plus collateral as security for your Khidr Solutions December 2011 8 loan.
  9. 9. Conditions A lender looks to the intended purpose of the loan or line of credit: Will the money be used for working capital, additional equipment, or inventory? A lender also will consider the total environment of your SME business, climate and conditions both within your industry and in other industries (like suppliers) that could affect your business, as well as the UAE economy as a whole. Khidr Solutions December 2011 9
  10. 10. First Meeting with BankerBe prepared with your ABC’s (A) Documents, plans  Capacity and presentation (B) Behavior – be  Character professional and display willingness  Capital & Collateral (C) Cash flows (D) Offer Due Diligence proof and  Conditions supporting docs Khidr Solutions December 2011 10
  11. 11. Typically what is Missing…. Evidence of HOW you run your SME business…. What is Risk Management approach and organization? Proof you are Pro-active in risk assessment and how you utilize risk tools in daily decision-making Demonstrate WHY bank should trust you to manage the SME business ** RiZk Audit documentation and plans provides such tangible proof. Khidr Solutions December 2011 11
  12. 12. Two dominant methods of Bank lending Cash SME Scorecard Flow Khidr Solutions December 2011 12
  13. 13. Types of UAE Bank LendingCash Flow Scorecard Established businesses  Credit analysis software Evaluate individual that ranks your SME business model business SME industry  Applies “benchmarks” Specific SME financials  Senior management Cash flow cycle critical interviews and on-site Understanding by SME inspection Owner of financials is  Key due diligence crucial documents Audited financial statements key to start Khidr Solutions December 2011 13
  14. 14. Three Stages of Bank lending Before After Lending Decision Monitoring Khidr Solutions December 2011 14
  15. 15. Get Ready…. • SME legal incorporation, MeMs/Arts and license documents • Owner’s IDs and passport • 2-3 Years Audited financials • 6 months bank statements • SME business ProfileBefore • Details of Request • Details of other credit outstanding from other banks/lenders • Ownership structure, succession plan • Description of Collateral/Security • Evidence of MIS and willingness to share • Proof of Insurance and Risk management Khidr Solutions December 2011 15
  16. 16. Negotiations…. • Detailed description of Collateral or guarantees • Assignment of receivables • Loan – Line of Credit agreement or After Promissory Note • Facility Advice letter from bankLending • Finalize General Terms & Conditions • Execution of Personal Guarantee, ifDecision required • Fixing conditions on financing customers or major suppliers • Proof of insurance Khidr Solutions December 2011 16
  17. 17. Repayment… • MIS set up with specific reports required by bank • Supervision of Cash conversion cycle • Checking Financial covenants (on leverage, liquidity, profit payouts,netMonitoring worth etc.) • Trouble-shooting troubles as they arise • Monitoring health of SME industry and general climate of UAE economy Khidr Solutions December 2011 17
  18. 18. Thank you for your attention. Visit Renovate Enterprise Value Khidr Solutions Consultancy Dubai Silicon Oasis