Business Tip

"Understanding your bank"

To understand how to gain financing from banks, one needs to understand how banks think. A fundamental thing to remember is that they only share your down-side; they have nothing to gain from your up-side. In other words, if you go bust, they lose money. If you make millions, they only earn a fixed rate of interest.

Hence, their view of any business is vastly different from that of an entrepreneur. Banks view every business as primarily a venture involving risks and seek to mitigate these all the time. Therefore, keep in mind that bankers may not be excited by a very clever business idea that is a “first” for example. They would much rather lend to a boring, predictable and stable business! Here is how banks will view a business that is seeking finance:

• What are the financial, business and structural risks?

• How can these be best mitigated?

• What is the ability to repay and how can this be demonstrated?

• How can we establish the willingness to repay (reputation, integrity and so on)?

• Is it profitable for the bank?

• What security or collateral can the bank get and how enforceable is it?

However passionate you may be about your business, remember bankers are not. They are worried about protecting themselves. You therefore need to put yourself in their shoes before making an application.

Vikram Venkataraman
Are you a start up?
If yes then, regrettably, it is very difficult to receive funding in the UAE, unless you stump up 100% collateral, which of course defeats the purpose. However, you need to remember that to seek funding, you need to prepare your firm, well in advance. Typically UAE banks require firms to be at least four to five years old, with at least the last three years being consistently profitable. So if you are a young firm you would be well advised to take a few steps:

• Open operating accounts with at least two banks (which have SME divisions) and build a track record with both.

• Appoint an auditing firm (ensure it is bank-empanelled) to audit your books from year one.

• Invest in a good accountant who will maintain reliable books or outsource.

• Build a good reputation with your suppliers, employees and clients; banks will check in the market and talk to people about what kind of person you are. This is very important. Remember; banks talk to each other too.

Are you looking for growth capital?
If your firm has been around for a few years and meets the criteria mentioned above, you should be in good shape to approach a bank for financing. However, you still need to follow some steps which, all other things being equal can cut the lead time of processing from six months to two months.

Here are five basic steps to be followed:

1. Clearly identify your financing needs. Your request should be backed by numbers – get help, if necessary, to prepare a robust but simple financial working.

2. Prepare a brief business plan (you can get a format off the Internet) but it has to be a combination of a business plan and a bank’s credit application. This means your plan has to contain detailed information on your business model and industry background, terms of trade, history, organisation chart and CVs of key people, financial snapshot and audited statements, list of suppliers and clients, and testimonials from clients.

3. Prepare a file of your business plan, audited statements, brochures, testimonials, trade licence, MOA, bank statements for the last six months, and all the other documents mentioned above. The careful preparation of a professional file makes the banks’ job easier and conveys to them the impression that they are dealing with a professional and organised outfit.

4. Identify the right type of bank. You have to ask around. Some banks are slow and ultra-conservative, others are pragmatic and speedy. Some will not lend to the industry you are in – check if you are on a negative industry list! Talk to people and make a shortlist.

5. Try and get an introduction to a banker at your chosen bank, from a mutual friend, acquaintance, or bank client who knows both parties well. Bankers put a lot of weight on good references. Send your file in advance, take a copy and attend the meeting, ready to make a brief presentation.

This seems easy but it is not, especially points one and two. If you cannot do it yourself, seek outside help. It is well worth it. Securing bank finance is relatively easy if you have the right ingredients in place, which you must ensure, if you are an early stage firm. If you are three or four years into business, then you can carefully plan and take steps to ensure that all the boxes are ticked.

If you are not prepared, chances are that you will go into a tailspin with banks – some may say “no” instantly, some may give you the run-around for four months and still not confirm. Remember, it is hard work to make your firm “bank-friendly”, but careful and far – sighted preparation can help you do this quite easily.

About
Vikram Venkataraman is a career banker with 25 years of experience in banking in India and the Middle East with various banks. Some of the key senior positions he held are:
• Executive Director, Regional Head of Credit Structuring ABN AMRO Bank, Middle East and Africa.
• Founding Member of Management Team and Head of Corporate & Institutional Banking, Dubai Bank.
• Head of SME Business, Transaction Banking and Factoring, Mashreq Bank, Dubai.
• Various assignments in Corporate Banking in HSBC India.

His most recent experience in banking has been as the Head of the SME Business at Mashreq, which he left in 2010 to co-found an SME focussed investment banking firm – Salvus Strategic Advisors, JLT in Dubai and Salvus Capital Advisors Pvt. Ltd. in Mumbai. Salvus advises SMEs with the objective of helping them grow. Raising equity and debt capital is an integral part of Salvus’ activities.

Vikram has also been an entrepreneur in the wellness business, giving him a unique perspective of SME issues, both from a banking and entrepreneur’s points of view. He holds a BA from Loyola College, India and MA from Oxford University, UK. He has served as the Secretary of the Oxford University Economics Society.

From: http://www.smeadvisor.com/2011/09/understanding-your-bank/