Sme approach to banks dec 2011

SME Approach to

Banks Dec 2011

Khidr Solutions Consultancy

Est 2010 Assisting SMEs in Value Creation

Renovate Enterprise Value REV ™ Up your SME

Khidr Solutions December 2011 2

Bank’s Perspective

What does it mean to be “bankable”?

What is SME Capacity?

Factors such as Time in Business, Consistency of data/figures, does Owner understand the working capital cycle and cashflows of business, clear separation of Owner’s money and company money, sound matching of funding vehicles (ST/LT), BCP, Succession plan, Risk Management practices, etc.

What is SME Willingness?

Factors such as Commitment to business, track record of repayments, reference letters from partners or major customers, evidence of Character, timeliness and sharing of business information, etc.

Khidr Solutions December 2011 3

Bank’s main filter – 5 Cs

A method used by lenders to determine the credit worthiness of

potential borrowers. The system weighs five characteristics of

the borrower, attempting to gauge the chance of default.

The five Cs of credit are:

-Character (integrity/consistency)

-Capacity (sufficient cashflow to service debt)

-Capital (net worth)

-Collateral (assets to secure lending)

-Conditions (SME environment/economy)

How Bank’s Visualize 5Cs

Conditions

Collateral

Capital

Capacity

Character

Khidr Solutions December 2011 4

Character

This is the first (general) impression you make

on the potential lender or investor. The lender

will form a subjective opinion as to whether or

not you are sufficiently trustworthy to repay the

loan, to manage the business, and/or generate

a return on funds invested in your company.

Your educational background and experience

in business and in your industry will be

reviewed. The quality of references, your

background and the experience levels of key

employees also will be examined.

Khidr Solutions December 2011 5

Capacity

Ability to repay is the most critical of the five

factors. A lender will ask exactly how you

intend to repay the loan or line of credit. A

lender will consider the cash flow from the

business, timing of the repayment, and

probability of successful repayment of the

loan. Payment history on existing credit

relationships -- personal or commercial -- is

also an important indicator of future payment

performance. Prospective lenders will ask

about your contingency plans for repayment.

Khidr Solutions December 2011 6

Capital

The money you personally have invested in

the business which is an indication of how

much you have at risk should the business fail.

Specifically, the Net Worth on your Balance

Sheet. Prospective lenders and investors will

expect you to have contributed from your own

assets/wealth and to be undertaking personal

financial risk within the SME business before

you ask them to commit any funding.

Khidr Solutions December 2011 7

Collateral

Collateral security or guarantees are usually

required as additional forms of “comfort” you

must provide the lender. Giving collateral

means that you pledge an asset you own (such

as your home, property, shares) to the lender

with an agreement that it will be a secondary

repayment source in case you can't repay the

loan. A guarantee is just that -- someone else

signs a guarantee document promising to repay

the loan if you can't. Some lenders may require

a guarantee plus collateral as security for your

loan.

Khidr Solutions December 2011 8

Conditions

A lender looks to the intended purpose of the

loan or line of credit: Will the money be used

for working capital, additional equipment, or

inventory? A lender also will consider the total

environment of your SME business, climate

and conditions both within your industry and in

other industries (like suppliers) that could affect

your business, as well as the UAE economy as

a whole.

Khidr Solutions December 2011 9

First Meeting with Banker

Be prepared with your ABC’s

(A) Documents, plans

and presentation

(B) Behavior – be

professional and

display willingness

(C) Cash flows

(D) Offer Due

Diligence proof and

supporting docs

Capacity

Character

Capital & Collateral

Conditions

Khidr Solutions December 2011 10

Khidr Solutions December 2011 11

Typically what is Missing….

Evidence of HOW you run your SME business….

What is Risk Management approach and

organization?

Proof you are Pro-active in risk assessment and how

you utilize risk tools in daily decision-making

Demonstrate WHY bank should trust you to manage

the SME business

** RiZk Audit documentation and plans provides

such tangible proof.

Two dominant methods of Bank lending

Cash Flow

Scorecard

Khidr Solutions December 2011 12

SME

Types of UAE Bank Lending

Cash Flow

Established businesses

Evaluate individual business model

SME industry

Specific SME financials

Cash flow cycle critical

Understanding by SME Owner of financials is crucial

Audited financial statements key to start

Scorecard

Credit analysis software

that ranks your SME

business

Applies “benchmarks”

Senior management

interviews and on-site

inspection

Key due diligence

documents

Khidr Solutions December 2011 13

Three Stages of Bank lending

Before

After Lending Decision

Monitoring

Khidr Solutions December 2011 14

Get Ready….

• SME legal incorporation, MeMs/Arts and license documents

• Owner’s IDs and passport

• 2-3 Years Audited financials

• 6 months bank statements

• SME business Profile

• Details of Request

• Details of other credit outstanding from other banks/lenders

• Ownership structure, succession plan

• Description of Collateral/Security

• Evidence of MIS and willingness to share

• Proof of Insurance and Risk management

Before

Khidr Solutions December 2011 15

Negotiations….

• Detailed description of Collateral or guarantees

• Assignment of receivables

• Loan – Line of Credit agreement or Promissory Note

• Facility Advice letter from bank

• Finalize General Terms & Conditions

• Execution of Personal Guarantee, if required

• Fixing conditions on financing customers or major suppliers

• Proof of insurance

After Lending Decision

Khidr Solutions December 2011 16

Repayment…

• MIS set up with specific reports required by bank

• Supervision of Cash conversion cycle

• Checking Financial covenants (on leverage, liquidity, profit payouts,net worth etc.)

• Trouble-shooting troubles as they arise

• Monitoring health of SME industry and general climate of UAE economy

Monitoring

Khidr Solutions December 2011 17

Thank you for your attention.

Visit www.khidr.ae [email protected]

Renovate Enterprise Value

Khidr Solutions Consultancy

Dubai Silicon Oasis