Getting Ready for a Loan

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Getting Ready for an MSME Loan

Preparing for MSME Loan

Be as open and transparent with your bankers or financial advisers as you can. This will enable them to grasp the full situation and to give you appropriate advice. To withhold important information, such as possible liabilities with other lenders or the fact that you have already pledged your assets, will inevitably cause difficulties at a later stage. Then you will have only wasted time and probably closed the door to future dealings with the bank.


General Credentials

If the lender does not already know you well, it is best to have background information ready. This may include:

Letters of Introduction

If you are not yet known in your business community, you may find it worthwhile to seek the sponsorship of someone respected by other business people who are sufficiently acquainted with you. A short letter, setting out your achievements and testifying to your good character and integrity, is a traditional method of introduction. Its effect will be positive if the referee is a person well regarded in the business community.

Your Profile

This is a resume or curriculum vitae, setting out your educational achievements, professional training, qualifications, employment record and achievements. It need not be longer than a page or two. Your profile helps your bank to assess your capacity for conducting trade, producing goods and services for export, and managing people.

Attach any certificate or reference from former employers if you feel this is relevant and will help to show up your experience and capacities, especially if the employer is known and respected, and has written favorably about you.

Brochure of Your Business

Do not hesitate to hand out your company brochure. This should state your type of business, your products and how long you have been trading. A list of clients or customers is helpful. If the list is confidential, say so when you give it to your banker. If you are in partnership or have directors in your company, state who they are and draw up a very brief resume on each, particularly if they have a good reputation in the business community.

Bank and Other References

If the institution is not your current bank, provide bank references that will enable the institution to check your credentials, particularly for regularity of payments, past borrowing record and general standing. The names of your accountants and lawyers may also be helpful.

Proof of Company Ownership or Registration

Some countries require evidence that the company in whose name you want to borrow belongs to you or has been duly registered. You may also be required to provide a sworn list of assets and liabilities in the absence of audited or approved accounts. Try to find out beforehand whether there are eligibility criteria for which you need to produce documents or statements, particularly when approaching government or state-owned institutions providing special facilities for exporters.

Financial Situation

A lender will expect up-to-date financial information on your business. The standard financial reports you should have ready are:

Balance Sheet, Profit-and-Loss Account, and Cash-Flow Statement

These should have been audited by a firm of chartered accountants, or certified by an independent accountant and approved by a resolution of your board of directors. Otherwise, you may have to produce evidence that your accounts are a true and fair reflection of your financial situation. The size of your balance sheet and the amount of equity in your business are significant, but by no means the determining factors in your banker's decision to grant you credit. Your banker may be far more concerned with the transactions that the facility will finance. If your audited accounts are more than, say, three months old (that is, if the closing date of the accounts goes back three months or more), you should also have with you a recent operating statement and cash-flow statement.

Budget for the Current or Coming Year

This document should show your projected sales and revenues for the current period or the coming year, as well as your operating costs and overheads. You should also have a separate paper showing your planned capital expenditure, if any. Your budgeted (or estimated) revenue should be sufficiently detailed to be credible. In other words, the figures must not simply be wishful thinking but based on firm and tentative orders to which you may add orders anticipated on the basis of past performance.

Commercial Information Details of Orders Booked

If you are requesting credit to fulfill a large or profitable new contract, have all documents, correspondence, quotations from suppliers, draft contracts with buyers and suppliers, and your own costing and calculations ready for discussion. This is all the more important if your order is for export. The credit facility you obtain from your bank will almost certainly need to tie in with the payment methods that you use with your suppliers or that are stipulated by your overseas buyers. Do not sign any firm contract with suppliers or customers before you have discussed credit and payment methods with your bank. The reason is simple. Most import-export business agreements or contracts stipulate the form of payment and the credit (delayed payment) terms the buyer or the seller offer or require. Once the contract is signed, it may be too late to alter the terms and this may seriously limit the scope of the facilities your banker may be able to offer you.

Business Plan

An up-to-date business plan for your company, showing intended capital investments and forecast revenue and expenditure for the coming three to five years, is an excellent document to produce during discussions with your banker or financial adviser. If you do not have such a plan, you may find it useful to draw one up. It will be of great value Ito you personally, and will add to your credibility when you discuss your credit request with lenders.

Feasibility Study

Feasibility studies are usually carried out in connection with medium- or long-term projects and are consequently prepared, among other reasons, as an aid to raising medium- to long-term project loan finance. You may wish to start a new project or expand an existing activity, and need capital to finance the additional capital goods required (e.g.., machinery, tooling, spares and raw materials). You will need a feasibility study to present to your banker. You will also need to give copies of draft or actual loan agreements with other lending institutions. These are important because the loan agreements may stipulate that you cannot borrow from another lender unless the loan is subordinated to them. This may mean that you cannot pledge fixed or current assets if the first lenders have fixed and floating charges on such assets. You may be limited to providing your bank with a second charge or some other, less secure, form of guarantee. In many respects, the feasibility study is not dissimilar in its presentation to the business plan. The main difference lies in its purpose.


Guarantees or Collateral You can Offer

Not many lenders will grant you a loan without security. What guarantees or collateral can you offer?

The terms Security and Collateral Mean the Same

Security is provided to the lenders by pledging assets which they can seize and sell off if you do not pay back the loan. Other forms of guarantees are an insurance policy to the benefit of the lender, or an undertaking by a third party to repay the loan, should you default. You can even obtain a guarantee from one bank to borrow from another. This is current practice if you borrow from a bank overseas. The guarantee is given to the foreign bank by a local bank that can more easily take a charge on your assets than the foreign bank. The most common form of security is a charge (pledge) on fixed assets, particularly land and property. Most lenders feel that land and property are readily marketable, even if sold at a price below market value. Moreover, land and property are evidenced by title deeds and, in many countries, these titles are registered by the authorities and any encumbrance would also be noted. (When an asset is encumbered, another party has a valid claim on it.) When an asset is pledged to a lender, it is encumbered and it cannot be pledged a second time to another party unless the two parties agree to share the security.

Other Fixed Assets can also Serve as Security

Machinery, equipment, vehicles, and other fixed assets are also considered a security for their loans by the lenders.  Investments are sometimes acceptable, particularly if they can be easily realized (sold). These are evidenced by share certificates of companies listed on the stock exchange, bonds, debentures, treasury bills, etc.
You can pledge current assets; stocks of raw materials, finished goods, commodities for export, even receivables. The easiest net asset to pledge is cash. This is called cash collateral. Your loan is secured by money! Borrowers resort to this form of security when they have liquidity in another bank which they do not want to touch. (It may be in another currency, tied up in investments, funds owned by a third party, or fund owned by the borrower, but not part of his or her business.) Have a list of assets that you are prepared to pledge as security for the loan. For land or other property titles, bring copies to show the bank.

Financial Institutions Rarely Lend the Full Value of the Security Taken

The reason is plain enough: should they sell the security because of a payment default, the price they obtain may be less than the value of the loan. The amount of cover needed for loans varies from country to country and asset to asset. In some cases, you may have to pledge assets worth two or more times the amount of the loan.

Source: An Extract from “How to Approach Banks in India?” – A joint publication by International Trade Centre (Geneva) and SIDBI, 2002