Most small businesses require financing to start up, maintain their daily operations and expand their products/services. small businesses often assume that banks are unwilling to give them the necessary financial support to start up and grow.
When businesses request for a credit facility from financial institutions, they assume that all they need to get a loan is a collateral which leaves them disappointed when their loan request is rejected.
As an SME, below are key factors to consider when requesting for a credit facility from any financial institution.
- Business Plan – Your business plan should be useful, easy to follow and easy to execute. It should have your business vision; which is a combination of your current and long-term goals.
- Financial Record – The importance of having financial records as a business cannot be overemphasized. There will often be a need to review your past and current financial records (including unaudited financials) to know your business liquidity as well as your expenses, savings and investments. The reason for this review is to determine if your business is capable of honouring it’s repayment obligations if you are given a loan.
- Minimal Cash Transaction – Most transactions should be processed via banks for monitoring, control and record purposes. High level of cash transactions by businesses scare financers especially banks because of the risk of diversion and mismanagement. Sometimes this can also lead to regulatory sanctions in respect to tax payments.
- Capital – Capital is the money you have invested in the business which also tells financers how much is at risk should the business fail. Financers will often review the company’s debt-to-equity ratio to determine how much money they are being asked to fund in relation to how much the business owner has invested (equity).
- Entity Concept – The business should be registered, preferably as a limited liability company. The reason for this preference is because most financers find it easy to fund a limited liability company than a sole proprietorship company due to issues of corporate governance, succession planning and key man risk. The operational structure of the business must also reflect a limited liability company.
- External Factors – A financer needs to understand how the economic environment affects the company i.e. who are the company’s competitors? Who are the company’s suppliers? What is the company’s market share? What is the structure of the market the company operates in, is it competitive or is it being controlled by an informal cartel?
- Succession Plan – Succession planning increases the availability of experienced and capable employees that are prepared to assume these roles as they become available.
- Management Profile – The management profile shows the quality and experience of the business management staff to determine their professional capability to manage a profitable business. Their previous track records of managing a successful business, qualifications and experiences will be reviewed.
- Collateral – A collateral is a safety net for banks. This is the last thing banks check in a customer’s loan request because while loans are not intended to be repaid by liquidating collateral, they must have a way to recover a debt if the business is unable to meet its repayment obligations.