This document discusses what banks look for when determining whether a small-to-medium enterprise (SME) is "bankable" for loans. It outlines the 5 C's of credit that banks evaluate: Character, Capacity, Capital, Collateral, and Conditions. SMEs need to demonstrate their willingness, capacity, risk management practices, and financial stability to satisfy these criteria. The document provides tips for SME owners to prepare documentation like financial statements and business plans for initial bank meetings to discuss cash flow-based or scorecard-based lending options.

1. SME Approach to
Banks
Dec 2011
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Est 2010 Assisting SMEs in Value Creation
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2. Bank’s Perspective
What 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.
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3. Bank’s main filter – 5 Cs
A 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)
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4. How Bank’s Visualize 5Cs
Conditions
Collateral
Capital
Capacity
Character
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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.
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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.
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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.
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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 can't repay the
loan. A guarantee is just that -- someone else
signs a guarantee document promising to repay
the loan if you can't. Some lenders may require
a guarantee plus collateral as security for your
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loan.

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.
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10. First Meeting with Banker
Be 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
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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.
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12. Two dominant methods of Bank lending
Cash SME
Scorecard
Flow
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13. Types of UAE Bank Lending
Cash 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
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14. Three Stages of Bank lending
Before
After Lending
Decision
Monitoring
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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 Profile
Before • 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
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16. Negotiations….
• Detailed description of Collateral or
guarantees
• Assignment of receivables
• Loan – Line of Credit agreement or
After Promissory Note
• Facility Advice letter from bank
Lending • Finalize General Terms & Conditions
• Execution of Personal Guarantee, if
Decision required
• Fixing conditions on financing
customers or major suppliers
• Proof of insurance
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17. Repayment…
• MIS set up with specific reports
required by bank
• Supervision of Cash conversion
cycle
• Checking Financial covenants (on
leverage, liquidity, profit payouts,net
Monitoring worth etc.)
• Trouble-shooting troubles as they
arise
• Monitoring health of SME industry
and general climate of UAE
economy
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18. Thank you for your attention.
Visit www.khidr.ae
omar@khidr.ae
Renovate Enterprise Value
Khidr Solutions Consultancy
Dubai Silicon Oasis