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What You Should Know Before Applying For Bank Loan

Virtually all businesses will, at some time, need to obtain outside financing. For the small business owner, this generally means obtaining some type of bank loan. And for many, this turns out to be a frustrating and difficult experience. It doesn’t have to be that way, however. Whether you are looking for financing to purchase a new business or are in the need of seasonal financing, proper planning will increase your chances of obtaining the needed financing. A side benefit may be that, during the process, you will learn more about your business.

There are several methods of obtaining outside financing, such as venture capital organizations or even bringing in another investor. However, the most common method is some type of traditional bank loan.

The Loan Process

Before approaching your banker for a loan, you should first get an understanding of what your banker is interested in and anticipate the questions that will arise during the loan process. Having substantial collateral is not the only factor in which the bank will be interested. Banks are in the banking business and have no interest in running your business, should you default on the loan. This means that your banker will be interested in how you will repay the loan, as well as the collateral that you have available.

Determine why you need the loan.

Although it may seem obvious, your first step should be to determine why you need the loan. If this is a start-up business, will the loan proceeds be used to purchase equipment and inventory, provide working capital, or maybe even finance product research and development? Or, as an established business, are you experiencing cash flow problems because the business is under capitalized or are you simply in a seasonally slow period? The four most common reasons for obtaining financing are: acquiring or starting a new business; working capital; seasonal peaks; and equipment acquisition. Although the basic framework is the same, your loan package should be customized to address the reasons financing is needed.

Cut expenses, reduce debt

Prior to applying for the loan, you should put your business in the best possible financial order. Pay close attention to expenditures. By reducing expenses as much as possible, you increase both your cash flow and profits. Work hard to collect any receivables owed to you. You may consider restructuring existing debt to improve your working capital ratios. Liquidating unused and superfluous assets will improve working capital as well as increase cash balances. You may even need to reduce your own salary.

The above comments hold true even if you are starting a new business. In most cases, you will be required by the bank to personally guarantee the loan. For this reason, your personal financial condition will play an important role in securing the financing.

Preparation of Your Loan Package

The next step is to actually begin preparation of your loan package. The components of the package are discussed below. Just remember to customize each to your specific needs.

Financial Data

In addition to prior years’ financial statements (three to five years), projections for future cash flow and profits should be included. Other financial data may include prior tax returns (personal and business), financial ratios, information on historic growth rates, etc. Include any information that will convince the banker of the fiscal soundness of your business. If prior financial information is poor, emphasize positive factors such as increases in gross margins or improvements in cash flow or key financial ratios. When the purpose of the loan is to start or acquire a new business, prior financial data may not exist. In these situations, projections and budgets take on additional importance. They should be supported by sufficient factual information to prove that the goals are credible and not just “pie in the sky” wishes.

Industry Data

By demonstrating knowledge of pertinent financial ratios and industry statistics, you will further convince your banker as to your credibility. Be sure and point out areas where you exceed the “norm”. The best source for this information is trade associations, but other sources are available. A lot of good information is available on the Internet.

Ownership Information & Resumes

This material is especially important when acquiring or starting a new business. Information on your background, education, experience and capabilities is vital.

Financing Plan

In narrative format, you should identify the reasons for the financing request and the amount and repayment terms of the request. Clearly indicate how the loan proceeds will be used. This portion of your loan package should tie all the other sections together into a concise financing plan.

The purpose of the loan request will dictate what other information may be needed in your loan package. When requesting funding for a new business, you should include information on marketing, management plans, industry background and predictions, and pro forma financial information (that is, financial information prepared as if the loan has been funded).

For working capital loans or an annual line of credit, provide information on how much funding will be needed during seasonally slow periods and how it will be repaid during the peaks.

An important rule in preparing your loan package is not to hide unfavorable information. Such information should be presented with the details of how you plan to overcome the problem. Full disclosure will add to your professionalism while discovery of undisclosed negative information will destroy your credibility.

Secure a Second Opinion

After completing a draft of your loan package, visit with your certified public accountant (CPA). If you are a start-up business, this is a good time to begin building a relationship with a CPA. A CPA will be able to identify strengths of both your business and your financing plan and offer suggestions on how to emphasize them. The CPA may also be able to provide guidance on how to put a positive note to what otherwise might appear as negative information. For instance, a drop in cash balances may be a result of paying off previous debt. Through experience, your CPA may also know which banks in your area are most likely to provide the type of financing you need.

Finally, as mentioned earlier, it is a common practice in today’s lending environment for banks to require a personal guarantee from small business owners. So no matter how convincing your financial information is, do not be surprised if the banks request such a guarantee. Give this request careful consideration, as a default by the business on such a loan may affect your personal assets, as well as those of the business.


Before you apply for your loan, do your homework – know your business, know your industry and know the answers to questions before they are asked. This information will not only make the loan process easier, but, more importantly, increase the probability that you will be successful in obtaining your loan.

by Danny R. Snow, CPA

What are the common SME loan appraisal criteria?

Viability of the business and its repayment capacity

Surplus operating cash flow projection sufficient to service/repay loan within the agreed tenure

Conduct of existing account is satisfactory

Acceptable Gearing ratio (i.e. % of loan to networth)

Good business/industry outlook

Capability of the management/borrower

Make a presanction visit and is satisfied with the operation of the business

Joint and several guarantee of directors

Any form of acceptable collateral

What are the common reasons for a bank to reject a loan application?

Common grounds for declining credit applications include:

Low ability of applicant to repay the facilities applied;

Purpose of financing does not align with facilities applied;

Poor financial records of the applicant / poor repayment records with other lenders

Applicant obtain other substantial borrowings resulting in high gearing

Unsatisfactory conduct of bank account by the applicant

Applicant has pending legal action

High business risk i.e. over dependence on single buyer or supplier

Lack of financial commitments from business owners (i.e. not willing to commit additional working capital)

Getting an appointment with a Bank

Don’t just show up in person – first make an appointment by phone. Ask the receptionist in the bank or the loan department for the name of the appropriate person who would handle your loan request. Of course it would be better, but not necessary, to get a referral from a friend or advisor such as your lawyer or accountant.

When you get the name of the appropriate bank officer simply ask for an appointment. Don’t offer any more details over the phone, unless the bank officer requests them. The more details you offer over the phone, the greater the chances you won’t get the appointment at all. Sound confident. Sound matter of fact. Sound like you don’t even need the money – that’s the kind of person that bank likes to lend to.

10 tips on how to get bank loan first time

Whether it’s for a growing company, or to start up a new business, finding the money to get started is one of the most difficult obstacles business owners face. The most likely (and easiest) sources of capital are your family, friends and your own savings. But institutional sources may be a wiser option. That said, without a previous track record, securing a first time bank loan can be tough. Banks often turn down first time loans because of the risk factors, and the costs of servicing small accounts. But that doesn’t mean it can’t be done. Here are ten top tips that you can take to the bank:

1. Banks Must Make Loans – Without loans, banks would not stay in business; loans are their bread and butter. So although banks often demand stiff collateral requirements for first loans, you shouldn’t be apprehensive about asking for one.

2. Research Lenders – Zero in on appropriate targets. Look for a bank that is familiar with your loan type, industry, and geographic area and has done business with people like you or companies like yours. Don’t be afraid to ask competitors and other local, related businesses for referrals. Seek out banks that give loans of the size and type you want. Some banks lend on a conventional basis (lending money without government support), while some banks participate in government programs (direct government funds or loan guarantees).

3. Prepare for the Meeting – Once you have identified a suitable financial institution, call ahead to find out the name of the bank’s officer, and set up an appointment to meet in person. Ask for a detailed description of all the materials he or she will want to review. Typically, these will include bank statements, financial reports, business registrations, debtors and creditors aging list , business and personal tax returns, and projections (if it is a new startup). In addition to the financial documentation, you’ll might want to bring along a two to three page executive summary that details what you will use the money for and how you plan to pay it back. Include any materials that speak to your reputation or your standing in the community. If you’re after a business loan, bring promotional materials about your business, such as brochures, ads, articles, press releases, etc. Before you meet with a lender, prepare a two to four minute presentation. Anticipate their questions. A confident and thoroughly prepared borrower is four times more likely to have his or her loan approved than a borrower who does not know the answer to some of the basic questions.

4. The Banker’s Basics – Bankers will ask you: How much money do you need? How long do you need it for? Be prepared to go into detail about what you will do with the money and why you or your business is low-risk. When and how you will repay for it? Convince the banker of the long-term profitability of your business and your ability to repay the loan. What will you do if you do not get the loan?

5. Image Matters – Present yourself as an entrepreneur who can and will repay the loan. If possible, get a referral from a successful entrepreneur; bankers tend to deal more favorably with those who were referred to them by their best customers. Dress in a professional manner for the interview. Type all your loan documents; handwritten documents look unprofessional. This is a business transaction, so treat it as such. A confident attitude will enhance your chances of getting the loan, so do not be apologetic or negative.

6. Keep It Real – Broad, unsubstantiated statements should be avoided in your loan application. The lender can easily check many of the facts on your application. If you cannot support statements with solid data, then don’t make them. It is best to keep projections, assets lists and collateral statements on the conservative side.

7. Don’t Push It – When the meeting wraps, ask the loan officer when you can expect the bank to make a decision, but don’t push too much. Doing so might result in a rejection. All you can do to ensure a speedy decision is to make sure that your application is complete.

8. Embrace Risk – Failure to discuss the risks is a red flag for loans officers. For instance, there is no business without risk, and if you don’t discuss it bankers will assume that you haven’t thought about it. They want to know if you have planned for the major risks and how you intend to manage worst case scenarios.

9. If at First You Don’t Succeed… – Keep trying one lender after another until you get your loan. If applying for a loan on your own is just too overwhelming, you might want to contact consultants such as GlobalBridge, who could use his or her contacts to negotiate a loan on your behalf.

10. The First is the Toughest – Bear in mind that the first loan is usually the hardest to get. In general, bankers prefer to lend money to borrowers who have borrowed at least once and have paid back at least one loan on time. They are not venture capitalists that make high-risk loans regardless of the profit prospects of the business. Bankers prefer to lend to low-risk, low profit ventures.

How to apply for a small business loan?

Applying for a small business loan is not simply a matter of “ask and you shall receive” – the truth is, many entrepreneurs do ask but few actually receive. The reason so many people get turned down isn’t that they have a bad idea for a business (in fact, many have brilliant ideas). Rather, the reason is that these people fail to convince lenders that they have a solid plan for how to use the loan to grow their business.

Here’s a list of few things you can do before you apply for a small business loan, to help ensure that you aren’t turned down:

Figure out how much you need. Crunch the numbers and determine just how much money you need to get your small business off the ground. It’s very important that you not borrow more money than you need. If you do, you’ll wind up paying more interest than you need to. Since many small businesses just barely scrape by for the first few years, every dollar you can save is vital.

Have a solid business proposal. Lenders will want to know what you plan to do with their money, so you better be ready to explain to them just how you plan to use it. Your business plan should be between 5 and 20 pages. Include accurate financial projections.

Collect the proper documents. If you’re a startup or a business that’s been running for less than two years, make sure you can compile three years of personal tax returns, including all schedules. You’ll also need one year of monthly business projections, as well as two years of annual business projections.

Determine what you have for collateral. What will you use to secure the loan? Collateral can include properties, fixed deposits and borrowed funds.

Talk to a professional. It’s great that you have an entrepreneurial spirit, but you can’t do everything yourself. Sometimes, you have to defer to the experts. Make an appointment to speak with a financial expert. Get his or her advice before you make any formal commitments to borrow money.

Shop around. Don’t take out a loan at the first place that agrees to lend you money. Look around and find out the terms that are being offered by different lenders, then make a smart decision for your company.

12 Tips for Getting Your Bank Loan Approved

Without a previous track record in business, securing a bank loan may be difficult. Banks cite risk factors and increasing costs of servicing small accounts as the primary reasons for minimizing their exposure to small businesses. Still, it can be done. Here are the steps that you should take to improve your chances of getting that much-needed bank loan:

1. Keep in mind that to stay in business banks need to make loans. Do not be afraid to ask for one. That is what the loan officer wants you to do. To increase your chances of getting a loan, look for a bank that is familiar with your industry and who has done business with companies like yours. Seek out banks that are active in small business financing. Some banks lend on a conventional basis (lending money without government support), while some banks participate in government programs (in the form of government participations involving direct government funds or loan guarantees). However, be aware that banks often demand stiff collateral requirements for start-ups.

2. As an entrepreneur, make sure that you are thoroughly prepared when you go to your banker’s office to request a loan. You need to show your bankers that a loan to you is a low-risk proposition. Have on hand a completed loan application, copies of cash flow and financial statement projections covering at least three years, and your cover letter.

3. Learn to anticipate every question that he or she has. Remember, the combination of information and preparation is the most powerful negotiating tool in the world. A confident and thoroughly prepared borrower is four times more likely to have his or her loan approved than a borrower who does not know the answer to some of the basic questions a banker asks. To show the extent of your preparedness, your business plan should also include answers to your banker’s questions. These questions normally are:

  • How much money do you need? Be as exact as possible; although adding a little extra for contingencies will not hurt.
  • How long do you need it for? Be prepared to go into detail about what the money will do for you and why your business is a good risk.
  • What are you going to do for it? Businesses use loans for three things: to buy new assets, pay off old debts, or pay for operating expenses.
  • When and how you will repay for it? Your cash flow projections should provide a repayment time frame. Convince the banker of the long-term profitability of your business and your ability to repay the loan by using your financial projections and business plan.
  • What will you do if you do not get the loan?

4. Do not take an apologetic and negative attitude. Keep your negativity in check. Present yourself as an entrepreneur who can and will repay the loan. Boost your image by providing your loan officer with any promotional materials about your business, such as brochures, ads, articles, press releases, etc.

5. Dress in a professional manner for the interview. This is a business transaction, so treat it as such.

6. Do not stretch the truth in your loan application. Broad, unsubstantiated statements should be avoided. The lender can easily check many of the facts on your application. If you cannot support statements with solid data, then don’t make them. Do your homework and spend time doing research to be able to support everything you say, including every single number in your projections. It is best to keep projections, assets lists and collateral statements on the conservative side.

7. Be sure all your documents are neat, legible and organized in a cohesive and attractive manner. Type all your loan documents. Handwritten documents look unprofessional. Don’t forget to include a cover letter.

8. Do not push the loan officer for a decision. Doing so might result in a rejection. Your banker cannot make a decision until all your documentation is complete. To ensure a speedy decision, make sure that your application is complete.

9. Be confident. An attitude of confidence enhances your chance of getting the loan. Show that you can make a success out of the money that the bank will lend to you. Visualize in your mind the positive results of your bank application.

10. Keep trying one lender after another until you get your loan. To improve your position as you change bankers and banks, the best way is to ask for a referral from a successful entrepreneur. Before you decide to approach a bank directly, find an associate, friend or acquaintance that is in good standing with the bank to give you a good referral. Bankers tend to deal more favorably those who were referred to them by their best customers.

11. Failure to discuss risk in your application. You must remember one thing: there is no business without risk. If you do not discuss risk, the bankers will assume that you haven’t thought about risk. Let’s face it – try as we might, we cannot plan for everything, for every contingency, for every turn of events. Bankers would want to know if you have planned for the major risks and how you intend to manage it.

Then, there is also the risk of too much success. The demand for your products or service may exceed well beyond your expectations, and they would want to know how you intend to handle success.

12. Remember that the first loan is usually the hardest to get. Bankers prefer to lend money to borrowers who have borrowed at least once and have paid back at least one loan on time. They are not venture capitalists that make high-risk loans regardless of the profit prospects of your business. Bankers prefer to lend to low-risk, low profit ventures than to high risk businesses or those with no record of accomplishment.

By Isabel M Isidro, Managing Editor of Power Homebiz Guides.

How to prepare a Loan Proposal and get funded?

Developing your loan proposal

Your loan proposal must answer the following questions:

Who are you?
How much do you need?
How are you going to pay it back?
What happens if you can’t pay it back?

Elements of your loan proposal

Generally, the loan proposal is comprised of the following elements:

Summary: Comes first; written last.

This should be clear, concise, accurate and inviting. You want to summarize how the proposed loan will be used, how it will be repaid and how it will benefit your business. Remember, that you are competing with many others, so you’ll also want to point out some of the distinguishing features of your business.

Top management profiles:

The key issue here is who are you? Be prepared to come under close scrutiny. You will need resumes as well as a summary of experience, qualifications and credentials for all owners and key members of your management team.

Business description:

You don’t need to repeat all of the information contained in your business plan, but you do need to present a solid description of your business. Include a brief overview of the history of your business, plus a summary of current activities. Make sure you clearly demonstrate that you understand your markets and industry (current trends and risks). Include literature showing your products or services. It is also helpful to include letters from suppliers, customers and other business references.


Include projected income statements and cash flow statements for two to three years. Your assumptions should be clearly stated and realistic. Generally, you don’t need to show “best case” and “worst case” unless the banker asks you to do so. But do be prepared to answer questions (in quantifiable terms) about what happens if some of your assumptions don’t come true. For example, if you anticipate obtaining a major new contract or customer as a result of newly expanded capacity, can you estimate the impact on your income statement if that customer decides to take her business elsewhere?

Financial Statements:

The loan package must include both business and personal financial statements. Make sure that you fully understand the “story” that your financial statements tell. Be assured that your banker will fully analyze your historical financial statements and calculate all the ratios. So, prepare in advance and point out any significant trends in an introductory paragraph.

Purpose of the loan:

Present a detailed statement of how you will use the loan proceeds.. Don’t forget to include the proceeds of the loan in your cash flow projections (and the interest in your projected income statement).


Remember, that you are offering the bank a deal that will make them money — you are not asking for an “allowance”. The attitude you should take is to ask, “how much money do you need, and how much will they lend?” and not, “will they lend it?”

Repayment plans:

You will have to make some assumptions about the terms of the loan in your proposal. (Obviously, this is necessary to prepare the initial financial projections.) In the first package, you will propose the terms that you want, but ultimately this will be a point that will be negotiated with the bank. The bank will consider a number of factors as they assess the overall risk of the loan and this will impact the repayment terms they are willing to give you.

Selecting the bank

You may already have a relationship with a bank, and this is generally the logical first choice for borrowing money. But whether this is your first loan, or you are borrowing additional money, you should consider several points before selecting the bank.

Although you may need money, you should be in the driver’s seat when it comes to choosing the bankers or partners you want to deal with. Make sure the bank is sincerely interested in your business and will provide you with the services you need. You should also look for a banker with whom you feel you can develop a good ongoing relationship and that has experience with similar businesses. Keep in mind the value of your business to the community and what its future deposits could mean for the bank.

Key questions to ask bankers include the following:

Do they have an industry specialty related to yours?
What is the average size of their borrowers?
What are their professional backgrounds, especially in terms of whether they are commercial or consumer lenders?
How long have they been in these positions?
Do they have the level of lending authority you need?

Whether you patronize a large commercial bank or a small community bank will depend on your needs. Major banks tend to offer a wider range of services and locations, which may be important if have the need for a variety of financial products and services. Community banks, on the other hand, are smaller, meaning that the banker you deal with daily might be able to make your financing decision personally or get it through the bank hierarchy quicker.

Presenting your loan proposal

Okay, now your loan package is prepared and its time to get ready to present your proposal. Before you go to the bank it is a good idea to role play with someone you trust. This is not the sort of presentation that you make every day, and this can help ensure that you are comfortable discussing all the material in your loan package, and have considered all the questions your banker might ask in the initial interview.

If you have a question about how to present your loan, now might be a good time to visit the Info

Exchange – discussion forum on lending and seek the advice of an expert or another business owner that has been through this before.

Before you approach a bank you should:

Have comprehensive written documentation ready.
Know your numbers inside and out.
Know what collateral you can offer.
Be prepared to sell yourself.

Handle the meeting professionally — make an appointment, show up on time and have a business demeanor throughout the meeting. You should tell a prospective banker what benefit your business brings to the bank in terms of average balances in checking accounts, savings accounts, and present and future financial needs. You should also ask them questions to see if you think they are the right people to handle your account.

After you present your loan proposal, ask the banker what can be expected in terms of a response time, or when they will request additional information. Obviously, the request won’t be approved in the initial meeting. But if you’ve done your homework, you will already have a good idea of whether or not your loan is likely to be approved.

If your loan is approved:

(besides celebrate) make sure that you:

Thoroughly review all loan documents and understand before signing. Consult with your lawyer or accountant if you have any questions.

Get documents in on time — frequently there are a number of documents that cannot be finalized until after the loan is approved and closed. Keep up that good impression the bank has of you by promptly responding to requests for additional information, documents, signatures, etc.

Maintain close contact with your loan officer. It is a good idea to give her progress reports — the bank now has a vested interest in your success and will want to be kept current.

Communicate problems. Bankers, don’t like surprises, particularly if the news is bad. So, make sure they are one of the first contacted if you encounter any problems.

Once your banker makes a loan to you, he or she has a vested interest in your business success. If you prosper, the bank prospers. If you fail, the loan they approved is not going to be paid.

If your loan is not approved:

Don’t despair.
A “no” today doesn’t necessarily mean no forever.
Don’t take it personally.
Be gracious.
Ask the banker to explain “why” your loan was not approved.
Don’t get defensive, seek information so that your next proposal addresses and corrects any deficiencies in the current application.

What to do when no one will lend you money?

There may be times when knowing the money markets, as well as preparation, presentation, luck and persistence just don’t seem to work. The key to overcoming this financial obstacle is not to get bitter: get resourceful. Remember there is more than one way to skin a cat.

If you have a viable business idea you should be able to find funding… as long as you have done your homework and developed a written business plan.

Other owners have raised money from friends by making attractive interest rate offers to friends and acquaintances for loans.

The secret is to prepare yourself — before you implement that growth strategy. Your business plan will provide you with a way to look, before you leap.

Need help to get funded? contact:

How to get faster business loan

MY previous article was about the importance of a good business plan to capture the attention of bankers, or potential investors. Many have asked me about a business plan to get a loan.

Generally, there are four broad stages in the loan application process – the preparation of the business plan, the submission of the loan application, and the assessment and approval of the said application.

Stage 1: Preparing the funding memorandum. To facilitate the loan-processing procedure, it is important that you provide the financial institution with full and complete information on your company. This is to ensure a speedy and smooth processing of your loan application. Before applying, you will need to prepare a business plan.

A funding memorandum is a written plan outlining your vision, mission and strategic objectives of the business. A well-written and structured business plan should encompass and provide relevant information on the business. In addition, it should be clear, simple and concise. It is then converted into a funding memorandum which is basically a business plan written for a lender, having the approach of reviewing a business from a different perspective.

Stage 2: The application process. To expedite the application process, you should submit a duly completed loan application form together with the business plan and include all other relevant documents as required by the financial institution.

Each financial institution has its own loan application forms and checklists. However, most of them require more or less the same list of documents for verification and evaluation.

You should make full disclosure of all financial information about yourself and ensure that it is accurate at the time of your application. Declaration of the correct information will also ensure that your application will be processed in a timely manner.

Financial institutions may carry out interviews and conduct a site visit to your business premises to better understand, verify and assess your financial position.

The questions posed during the interview and site visit relate to the nature of business, management structure and market positioning i.e. market share, competitors, market outlook, future plans and product life cycle.

Stage 3: Assessment of the loan application. The third stage of the consumer credit process is credit evaluation. During this stage, a decision is made to approve or reject the credit facility. Once the information is verified, the financier proceeds to the evaluation stage.

Credit evaluations are not based on a single factor, but upon how an applicant matches a set of lending criteria laid down by the lender. Correspondingly, these criteria inherently reflect the risk-tolerance levels of the credit grantor concerned. In short, these criteria reflect how the lenders want to do business, their business policies, strategies etc.

In addition, banks make use of financial ratios to rate a particular business. Some of the financial ratios used for credit ratings are the percentage in growth of sales year-on-year, as well as profitability and stability ratios to determine the level of net working capital required, while also taking the repayment ability of the said business into consideration.

The broad principles that financial institutions apply to assess your business’s credit risk can be summarised by the 5Cs (which comprise both qualitative and quantitative assessments):


To lenders, this is the most important requisite and the most difficult to measure precisely. The financier needs to determine the willingness of a potential borrower to repay the loan facility. It must be highlighted that even if a potential borrower has the capacity to make sound repayments, his credit facility may still be declined if there are grounds to suspect or question his willingness to make repayments;

The factors normally considered in examining a character of potential borrowers include past records or credit history of the borrower; stability and duration of his employment/business; experience and qualification, and reputation.


This is a measure of the shareholder’s commitment towards the business. Generally, shareholders who inject larger amounts of capital into the company are deemed more committed to growing the business;

The client’s capital is determined by his current level of liquid assets, current level of unsecured borrowings and their list of income sources, fixed expenses, as well as contingent liabilities;

To the lenders, the capitalisation ratio (%) i.e. total net debt over total capitalisation, and tangible net worth over total capitalisation will determine the commitment and debt level of the business and, correspondingly, the size of loan extended.

However, lenders will also look at the industry of the said business and perform a set of benchmark ratios as a reference. For instance, a manufacturing company will have a higher capitalisation debt level compared with a trading company.


Capacity looks into the client’s ability to pay and handle the proposed new level of debt;

Here, the company’s profitability ratio is analysed by studying the company’s profit margin i.e. gross profit margin and net profit margin;

The NBIT over sales figures will reveal the company’s ability to service its finance cost from the total debt bearing interest category;

Liquidation ratios are also analysed at this stage by studying the coverage ratio i.e. total borrowed funds over tangible net worth, which is then used to determine the speed at which a business is able to sell its assets to repay debt;

It is also determined by past earnings, projected future earnings and past records of meeting financial obligations.


This will prompt the financier to examine whether the client’s employment or business will withstand the vagaries of the economy, social, political and international environments, government regulations, competition or changes in banking policies;

The turnaround days are analysed at this stage by looking at inventory turnover, the average collection, and the payables period. This will then project the relationship between suppliers and customers and any other issues in regards to collection and payables;

The lenders will also look into the company’s list of suppliers and customers to determine the business risk with regards to the immediate parties – the supplier and customer.


Collateral is considered only as a cushion for the financier to rely on when there is a default in its primary source of income;

A financier would prefer that a loan is repaid rather than having to collect proceeds through auction of the collateral;

Collateral is examined based on its ease of disposability and whether it is adequate as security i.e. fixed deposits are always preferred to fixed assets in terms of disposability factors.

However, banks will obtain satisfying proportions of both assets as mentioned above, in addition to other forms of security – corporate guarantees, director’s guarantees and third-party security documents which are deemed acceptable.

Financial institutions will conduct credit checks and study the patterns of the business current accounts, repayment records of their loans and existing trade facilities. Some financial institutions have their loan evaluation matrix in the form of scores as part of their credit evaluation processes.

Stage 4: Approval of the loan application. Once the financial institution approves your loan, it will issue a letter of offer that sets out a detailed credit facility, interest rate for each facility, collateral and terms and conditions under which the facility will operate.

You will be given a period of acceptance upon receipt of the offer letter. Read and understand all contents therein and revert should you feel that there are contents which are not suitable or in line with your company’s financing objectives for changes thereon. There are times when the intent and discussions of the borrower and the documentation from the lender do not match.

Upon acceptance of the letter of offer, the financial institution will proceed to the documentation stage. Here appointment of professional and legal advisors will take place to satisfy all terms and conditions under the letter of offer, and to prepare for a drawdown of credit facility.

The entire timeline from start to prepare a business plan, converting it into a funding memorandum to final disbursement, provided the checklists are met, usually ranges anywhere from three to six months. The process is faster if the applicant knows what the lenders really look for.

by Girish Ramachandran, executive director of RSM Strategic Business Advisors

Project Financing Strategy

When it comes to Project Finance, if you need the cash yesterday, please do not apply. Project Finance is precise and onerous and requires months of work and planning.

It is not the cheapest form of finance, but it does provide for ‘Greenfield’ solutions, based on projected cashflows. Moreover, Project Finance has some additional benefits for the company, which include:

Allows the company to ‘ring-fence’ the project and not affect its balance sheet or borrowing power.

Lending of funds is based on a stream of cashflows generated by proposed project assets. In a sense therefore, it is also considered to be a limited recourse funding, not exposing the company’s assets outside the project.

It provides a structure for ‘sharing’ risk and may involve several joint venture partners, particularly useful in cross border situations which could provide an opportunity for double or even triple dipping structures and tax advantages across jurisdictions.

A Project Finance approach allows for the careful management and control where a consortium is involved in a multi-discipline project. It provides for structure, discipline and project management processes which allow for the coordination of various participants.

The top five sectors (in order) preferred by financiers in this discipline are:

  • Power
  • Infrastructure
  • Public Private Partnerships
  • Mining
  • Oil and Gas

Other emerging sectors include Large Scale Manufacturing, Renewable Energy, and Leisure based sectors such as theme parks, resorts and casinos.

However, any sector can benefit from taking a similar approach to funding, and imposing the rigor of project finance internally.

Considering the inputs, risks and modeling sensitivities not only provides great insight for the management, but addresses concerns and provides comfort to investors and financiers in a way which goes beyond the usual best case scenario and worst case scenario approach most managers take.

In any type of Project Financing there are a number of risks (anything from 15 to 20), which need to be carefully considered. Part of the due diligence involved is to identify each risk, rank them in order of potential impact to the bottom line, and address where possible through mitigating strategies.

I emphasize “where possible” because there are some risks that you just simply accept as part of the course, in which case you merely identify and assess how the risk is allocated (who carries that risk). So what are some of the risks we look at?

  • Political
  • Technology
  • Environmental
  • Completion
  • Supply Risk
  • Social
  • Sponsor
  • Reserve (Inputs)
  • Legal
  • Operating
  • Market
  • Tax
  • Infrastructure
  • Financial
  • Force Majeure

If you have a project and do not consider each risk, then you run the risk of a credit committee rejecting the project (if lucky), and you will find an up hill battle in trying to obtain funding.

At worst though, if funding for the project is generated internally or through third party equity, an oversight of any of the risk factors mentioned potentially places the project and equity at an unacceptable level risk.

This type of financing takes time to negotiate, and for smaller sized projects, a contingent equity facility may be the best approach in order to save time.

The facility could allow a project to begin to take shape, fund bankable feasibility studies and provide a ‘bridging’ function, while the company negotiates longer-term project finance.

As project finance requires an equity component as well, the facility can be used for this, as well as creating a form of guarantee on behalf of the sponsors to provide an additional level of comfort to the lender, but without tying up huge sums of cash for the sponsor (developer).


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