One topic that never grows old is looking at what banks look for when reviewing term loan applications. A lot of SMEs still struggle with this. This presentation should help the interested parties frame their applications better.
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What banks look for in loan applications
1. Applying for A Term Loan
What The Banks Will Be Looking
For
2. Why Appraise a Project?
Contents of Project Proposals.
The Appraisal Process.
What is the Project?
Project Operations.
Is there a Real Market?
Financial Evaluation.
Environmental and Other issues.
3. The borrower is inviting the bank to invest in his/her project.
An investment decision should only be made on the basis of careful
analytical review.
4. Banks invest on the basis of risk return trade-off, whereby the
higher the risk the higher the required return (interest) from a
project.
5. Appraising a project proposal is essentially an assessment of its
inherent risk.
The bank must collect information to adequately assess potential
risk in a proposed project.
The risk is usually NOT obvious!!
6. • What is the project?
• Who are behind the project?
• Is there a real market?
• What are the operational issues of the project?
• Can the project repay the loan and provide reasonable return to the
sponsors?
• What are the environmental and other issues affecting the project?
7. Who are behind
the project?
What is the
project?
Is there a
Real market?
Is technology
Available?
What are the
financial
returns?
8. Sponsors
• Do they have proven ability in managing a project of this size?
• Do they have the technical ability to keep business running?
• Do they have the necessary skills to implement
required financial, costing and administrative
controls?
• Are they prepared to put some of their own funds
into the project?
9. The Company
• Name, nature and evolution, place of incorporation, address and
place of business.
• Capitalization and shareholding and control.
• Memorandum and Articles of Association.
• Associated or other related parties.
• Previous exposure of the company and sponsors to bank loans.
10. Profiles of Management
• Qualifications and Experience.
• Responsibilities.
• Recruitment and Promotions.
12. Accounting and Internal Control System
Past Financial Performance review
- Profitability, Liquidity, Solvency and Other Financial
Characteristics.
- Auditors and Other Advisors
- Cash flow analysis
13. What will the project do?
What equipment will be needed?
Can the technology required be supported locally?
What raw materials are required?
14. Machinery
• List of requirements.
• Availability.
• Basis of selection – (price, quality, support, spares).
• Capacity.
15. Compatibility of new equipment and future expansion.
Location and reason for choice:
- Availability of expansion space.
- Site development requirements
- Access to transport and other facilities.
- Utilities – water, power, telephone, sewerage.
Implementation Program/Timetable
Technical assistance-commissioning, professionals
required,etc.
16. Project operations and facilities
Alternative production processes
Justification of selected processes
Legal aspects – licenses, permits, etc
Raw materials and sources
Quality controls
17. Raw material requirements
Volumes, product mix, sizes, packaging
Labour requirements and sources
Training requirements
18. Is there a demonstrable market?
Is the market growing?
How will the project break into the market?
What sales prices and volumes are achievable?
What is the competition doing?
19. Customers
• Characteristic – age, social class, etc.
• Benefits derived – economy, durability, convenience, safety, etc.
• Market size and projected market share
Competition
• Location, relative size, barriers to entry
• Advantages/disadvantages
20. Pricing Strategy
• How are prices calculated?
• Are they fixed or variable?
• What is the discount policy and credit terms?
Selling Strategy
• Sales representatives
• Recruitment and appointments
21. Distribution chain
• Agents, distributors, wholesalers
• Means of transport
• Anticipated problems
Advertising and Promotion
• Media to be used
• Promotion campaign and methods to be adopted
22. Key Questions
• How profitable will the project be?
• What are the working capital requirements?
• How quickly can the loan be repaid?
• Sensitivity Analysis effects of different commercial environments
23. Pre operation costs
Working capital
Other capital expenditure
Sources of funding – debt and equity
Reasonableness of assumptions
24. Pollution and ways to cope with it
Health of employees
Environmental degradation
Government regulations and legislation
Social responsibility