1. MGT601 SME MANAGEMENT

2. Guide Lines for Approaching Lenders – I
Lesson 20
Guide Lines for Approaching Lenders – I

3. Chapter Learning Objectives
This lecture is dealing with the approach guide lines for approaching lenders.
The lecture also explains the expectations of a lending institute from borrower.

4. How to Approach Lenders
You believe that now need a short term credit from a bank to finance your trading activities. Your next step is to decide whom to approach.
You should take this decision on the basis of financing sources available in Pakistan, how you rate their effectiveness and your own experience and affinities with these institutions.

5. How to Approach Lenders……
If cannot obtain the credit you need through them, because of the lack of resources or the weakness of the financial sector, it may be possible to you to reach overseas institutions.
There are also private institutions that provide trade finance.

6. How to Approach Lenders……
It is the first time that you are approaching a bank for a loan request and don't know how to go about it. Or a bank has previously turned down your request. As a borrower you probably know that lenders and in particular banks, have pre-decided specific criteria against which they measure entrepreneurs who approach them for financing.

7. How to Approach Banks
Talk to your banker or a financial advisor before you start negotiating with your customers or suppliers. Remember the working capital serves to pay for goods and services. The type or terms of credit you obtain from a bank should be closely linked to the method of payment you use to settle your creditor’s invoices, or that your customers or buyers use to pay you.

8. Bank’s Lending Criteria
There are no standard criteria for short-term credit.
Banks tend to set their own internal rules.
Banks are bound by general regulations and guidelines established by the State Bank of Pakistan.

9. Bank’s Lending Criteria…..
There is usually a lending limit per customer.
Banks are required to report any extra exposure to a customer or a group of related customer beyond 30% of its unimpaired capital.
As per prudential regulations, the bank has to make sure also that the total accommodation availed by the borrower is not more than 10 times of the total capital and reserves (free f looses).

10. Bank’s Lending Criteria…..
Another requirement set forth in the prudential regulations is that the debt equity ratio of the borrower may not exceed 60:40 and the ratio between current liabilities and current assets should not be less than 1:1.

11. Bank’s Lending Criteria…..
As per prudential regulations, the bank, as a matter of rule, should obtain copy of accounts of borrower related to the business, for analysis and record purpose.
The requirement of the account is related to the amount of financing required.

12. Bank’s Lending Criteria…..
Banks may sometimes invoke their lending criteria or statutory regulations as a pretext for not granting a facility to a borrower.
There is nothing much you can do about this and in any case, it is unwise to insist on borrowing from an unwilling lender.

13. Short-term Lending Criteria
1. Good Cash Flow As a borrower, you must show that your performance is positive and that operations are not only profitable but also generate enough cash to cover all your commitments.
2. Adequate Shareholder’s Funds In other words, you must not be already over committed to other lenders, but have a reasonable proportion of your own capital in the business.

14. Short-term Lending Criteria…..
3. Adequate Security You will not obtain credit from a bank if all of your assets are pledged to other lenders.
4. Expertise in Trading Most institutions like to know that you have a good record of successful trading. It is difficult to convince a banker to lend you money if you are a complete beginner, or if you’re a starting a completely different and new trading activity with untried products and unknown customers or suppliers in countries you have never dealt before.

15. Short-term Lending Criteria…..
5. Good Reputation and Standing Your references and credentials must be acceptable to the lenders. They would no doubt find it difficult to convince their loan committee or board to approve an advance to a bankrupt company or a known crook! But, even assuming that your past is without blemish, it is helpful to have a backing of a reputable sponsor. This could be a well-known person in the business, your trade association or even your customer or supplier.

16. Short-term Lending Criteria…..
6. Specific Purpose Although some lenders will be prepared to grant overdraft facilities on the basis of the security you offer, most institutions prefer to see their loans linked to specific transactions. In these cases, the transaction must be explained in full detail and shown to be profitable and self liquidating (the money borrowed will be repaid from the proceeds of the transactions to be financed).

17. Presenting Your Request for a Short-Term Loan
1. Know whom you are dealing with
Seek advice from your trade association, chamber of commerce, or association of industry.
Try to obtain a copy of the institutions annual report and see what its affiliations are, and who its shareholders and directors are.

18. Continued…..
Brochures and annual reports, are normally freely available in the banks and other institutions, tell you a great deal about their structure, organization and services.
Banks should also indicate their lending rates and should give you their schedule of their charge and fees for services.

19. Presenting Your Request for a Short-Term Loan….
2. Give prior notice of your intentions
3. Be Well Prepared
4. Seek Advice
5. But Be Cautious:
6. While Avoiding “shopping around”

20. Conclusion
There is in fact nothing wrong in trying to get to know the banking sector and wanting the best deal. But you should avoid giving the impression that you are also talking to others after negotiations have reached the stage where the agreement is virtually finalized and awaiting management or board approval. The success of a good borrower-lender is built largely on trust. Trust is developed over time and is a result of a positive experience.

21. Conclusion….
The banker will often prefer to try out a prospective customer by offering small, well secured loans on a very short-term basis to see how it works. S transactions are successfully repeated, the customer’s standing rises and his or her credit improves. When you approach an institution for the first time, bear this in mind. The cheapest lender may not in the long run, rove the best.

22. Thanks you
Happy Learning,
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