You Can Have Banks' SME Loan Easy

Once upon a time, my bankers used to tell me that they would prefer to screen credit for big clients who are seeking large fund than those apply for small amount of loan. Their philosophy is "Cost is the same but margin is way higher". Whether they are processing a loan of $ 10,000,000,000 or simply $ 10,000, they would each need one application form, consume almost same amount of paper works and other overheads.

But time has changed. Banks have realized that the small and medium enterprises (SMEs) are the main forces in driving the economy in many countries like Italy and Thailand. Many countries now have set up SME banks to finance these small entrepreneurs to further propel the economies. Even commercial banks have joined the bandwagon to offer loans to SME.

They set up SME department, create new products suitable for small loans and market their products aggressively. One of their very popular products on the world market now is Business Instalment Loan (BIL) - a term loan with a purpose to finance the expansion of small business. The repayment of the loan is through Equal Monthly Instalments (EMIs) which makes it very convenient for the borrower to repay the loan.

So, what are we small entrepreneurs to do in preparing ourselves to benefit banks' offer. Well, the way to have a successful SME loan is to know what exactly does a bank want and get ready for it.

As like all the other commercial lending, banks would do the 4 Cs analysis to approve a loan. We should, therefore, make a thorough understanding of 4 Cs and do best to comply with these requirements before we approach banks. This will save us the time and efforts in applying for a successful SME loan. The 4 Cs are:

Character

The first 'C' is 'Character' of the borrower/owner in relation to his 'intention' to repay the debt obligations as per the agreed terms including timelines. Bank would consider this first 'C' as an extremely important criterion for SME credit decision. This may sound easy for us small business to comply as we do not intend to cheat the bank anyhow. However, banks would screen our good intention through our good record with Credit Bureaus, repayment track record with other Financial/Non-Financial Institutions and market reputation. And this is the first 'C' we should prepare.

Capacity (Cash Flows)

The 2^nd 'C' is 'Cash flows' generated in our business to repay the debt obligations. Bank would be looking for adequacy cash flows in relation to the current and future debt (arisen from the new loan) obligations. The simple financial tool bank would deploy to this 'C' is termed Debt Service Ratio (DSR) {also referred to as Debt Burden Ratio (DBR) or Debt Income Ratio (DIR)}. It is a way of determining the capacity of the borrower to repay his/her existing as well as incremental debt obligations.

This is done by dividing amount of money needed to repay to financial lenders by the net income of the business. The lower the rate is merrier. Bank would be happy for rates of 60-70 % range. A rate of over 90 % is very likely to be rejected.

Credit Analysis (Credit Conditions)

In making a SMEs lending, banks would need to look at the 3^rd 'C' or 'Credit' analysis. This is a general credit study of the business including industrial outlook. Bank would hesitate or avoid lending to business with bad reputation or engaged in a sun-set business even with good business 'character' and 'cash flow' of the 2Cs above..

Collateral*

The last 'C' or 'Collateral' (cash, near cash security, real estate, industrial property, etc.) is the least important on the 4Cs when banks consider SMEs loan. The first and second Cs of 'Character' and 'Cash flows' are top priorities as the comforts to banks with collateral providing additional comfort. Banks do not normally require collateral for their BIL markets throughout the world.

· Note: Personal Guarantee is not considered as collateral.

We will not only enjoy a quick and successful credit application with a good preparation of 4Cs, we will also enjoy many more disguised benefits in so doing. We will receive respect from our bankers, good financial practice, peace of mind and others. So, why do not we start practicing 4Cs in our SMEs even if we still do not need a bank loan now?