Financial Magazine

What are banks looking for?

Introduction
Thinking of borrowing money. Do you really need to go in the red? Ask before you borrow. Apart from anything else, getting advice is much cheaper then paying interest. Banks look first and foremost at the character, experience of the business owner and the cash generating capacity of the business itself.

Furthermore banks focus there lending at certain industries, they want a mixed and balanced credit portfolio. Different banks target different sizes of companies and different kind of tenors of loans. Banks can only lend out the amounts of money, which are deposited, by people and business’s for the period it is entrusted to them. So if your business doesn’t fit the policy of one bank you may be a target client of an other bank.

In this respect it is essential to stress the importance of proper planning and preselecting a bank before starting your search for finance. Under any circumstances, engaging a professional will increase your change of success and may actually save you from spending money unnecessarily. It will certainly save you time.

Seven steps in preparing your search
Firstly banks will look at the background and experience of the individuals or business. Character can be a pointer of potential success. This includes integrity, past performance and evidence of created wealth. No business proposition can be viewed in isolation from the people who put it into action. But your presentation of your new plan is key to gain credibility. Even if you have a successful track record, bear in mind it is only history.

Secondly banks will look if you have the means and resources to run your business. Can you show the bank with reports how the business is doing and what it needs to stay successful?

Thirdly, explain in detail why you wish to borrow money. The bank will want to know that you have thought it through, and that it seems sensible. Concentrate on the business logic, why is your business proposition unique? Specify the purpose of your investment in detail. Remember that you ought to know more about your business proposition then anybody else.

Fourthly, make sure you calculated the correct amount you need. Be realistic: don’t ask for too little, if you come back for the second time the bank will do a full investigation what has gone wrong with you and/or your business. The bank will look for some commitments, like a collateral of the borrower and/or a cash deposit.
Typically you ask for more debt than you will put in as equity. The bank have more to lose while his rewards are capped by a fixed interest amount. On the other side the cash you have invested might be all you have; so from your perspective you have everything to lose.

Fifthly, do you have enough cash to repay your debt and is the cash flow sustainable for the period of the loan? What is the business logic behind your cash inflow?
Cash flow will not grow in time without a correlated business activity, demographic changes or industry changes.

Sixthly, many lending schemes include overdrafts and reducing loans over an agreed period of time. The bank will set the interest-rate based on his view of the risk and what he thinks he can get from the entrepreneur, in view of his banking experience and knowledge. Thoroughly explaining all risks with their mitigants and have a professional negotiation will help the borrower. The bank might ask for a collateral for reduction of risks; this should be reflected in the interest-rate.

Lastly, effectively communicate your business plans. Things untold are like merchandise unsold. Unless you have done this several times before you must find a person highly experienced in preparing and communicating your business plans. There is no standard in preparing business plans. Your plan should be tailormade for your audience. For example, while some will be impressed by graphs and colors, others will simple put your artwork aside and start asking questions only you can answer. After this session the bank will spend time to research the industry if, the business logic is not fully understood.

Albert Kluyver

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