In Malaysia there is a huge distinction between running a successful business and having the same business “Bankable”. The mistakes that many entrepreneurs make are to judge the bankability of their business based on their benchmarks on success.
For example let’s assume that an entrepreneur has set up a business in 2014 with capital of RM 100,000.000 and within the first fiscal year he has made a turnover of RM 750,000.000 with a profit of RM 280,000.00 and in 2015 the said business revenue has increased to RM 1 Million with a profit margin of RM 350,000 and in 2016 the turnover has increased to RM 1.5 Million with a margin of RM540, 000.00. Now the company is looking at orders and estimated revenue of RM 2-2.3 Million for 2017.
Now based on the company performance and growth rate how much do you think that the entrepreneur would be able to finance his operations in 2018? Would you assume if you were the entrepreneur, seeing that there are confirmed orders for 2018 in the ratio of RM 2-2.3Million that a sum of RM 1 Million should not be a problem as you have the track records to prove it?
Well, here is the kicker! Financial Institutions do not see the business the way you do!!! The entrepreneur is right in assuming the said figure as in the business world, it is justified, however in banking world it would be seen as an “Exposure Risk”.
WHY? The reason being that the company is just 3 years old and that the orders are based on projections and can’t be quantified at the time of application.
So how much can the said entrepreneur expect? We are assuming that all his credit credentials are perfect or at least close to it, as these factors would be explained later. Based on the business turnover the conservative amount that the entrepreneur would most likely expect is RM 300, 000.00- 450,000.00.
The figure is derived by taking in the last Audited Revenue figure of RM1.5 Million and estimated profit margin of 36% the financial institution would look into a conservative Loan amount of between 20-30% of the total recorded revenue of the company based on their last financial statement.
Of course to attain the said approval is again based on several other factors that the financial institutions need to scrutinize in a Client Scoring System (CSS). The system looks at areas such as:
The Financial Institution would look at the current loan ratio of the company in terms of other borrowings such as Business loans such as term loans, Overdrafts, Multi-trade facilities, Hire purchase of company vehicles etc. The payment records have to be prompt as the Applicants payment discipline is determined by these records.
The Financial Institution would also look at the current loan ratio of the Directors of the company in terms of their individual borrowings such as Personal borrowings such as term loans, Overdrafts, Credit cards, Hire purchase of personal vehicles, Housing and other property loans etc. The payment records have to be prompt as the Applicants payment discipline is determined by these records.
COMPANY AND DIRECTORS PERSONAL CREDIT VALUATION (CCRIS)
The Financial Institution would look at the current loans already approved and other pending applications. As this would determine the mind set of the borrower. If the borrower applies to 1-2 Financial Institutions then it shows that the borrower is focused and has a repayment plan in mind. However, when the Borrower applies to 4 Financial Institution or more, it shows that the borrower is “Shopping around” and is not certain what exactly to do with the borrowings and risks not paying the loan back, therefore becomes a credit risk to any bank.
Another aspect of credit scrutiny that most entrepreneurs are not aware of dishonoured cheques systems. If you or any other director of the company have dishonoured cheques on a personal capacity that is a bad mark on your application, if there has been dishonoured cheques from the company account, then it really affects the application and can be rejected if the there are not justifiable reasons. This basically shows that the borrower’s behavioural patterns on how they look at the financial responsibilities.
This is something that I need to stress about, as business individuals running the business is the top priority and usually things like accounts and Audits are usually given to the safe care of the company secretary’s who in turn passes it on to their known Auditors and so forth. However, we have encountered major problems in the last 5-6 years where the Financial Institutions have blacklisted several audit firms. If your accounts have been unfortunately audited by these firms, then your applications would be rejected as it is assumed that the figures have been fraudulent. So please be aware of who are your accountants and auditors.
PREVIOUS LEGAL PROBLEMS
This is something that I also believe is a major factor to most Financial Institutions today as if the company is under the form of winding up petition or any legal cases taken against the company, it would be shown on the system and the Financial Institution would reject the said loan.
For directors, if they have been taken in for bankruptcy or any other legal proceedings that would also reject the application. An important note that most people are not aware of: Even if you have settled the Bankruptcy action or any other legal matters all financial institutions would have to wait 1 year (12 calendar months) for the date of redemption before they can proceed with any other loan applications.
These are some of the reasons as to why your loan applications may have been rejected and there are other factors as well, but those are deemed confidential and are for bank internal use only that I cannot disclose at this point.
There are also the factors of the types of loans that are required for the business. Most people are only familiar with facilities such as term loans and overdrafts that they are oblivious to many other types of facilities that would be useful to their company.
I would advise everyone to identify WHAT THEIR BUSINESS NEEDS ARE? First in foremost, then approach their bankers to see what can be done.
WHY DO FINANCIAL INSTITUTIONS HAVE SUCH STRINGENT MEASURES?
Now that we have seen what the Financial Institution look at, let me explain to you the reasons for such scrutiny from the Financial Institutions. First in foremost, we need to understand that the Financial Institution is also a BUSINESS!.
Though they are engaged in the business of lending money they need to be cautious as to whom they lend to, as they need to ensure their investment(s) are secure.
In the last few years the numbers of NPL (Non Performing Loan) ratios are increasing drastically and these events have forced financial institution to tighten their parameters of lending as they are looking at serious and secure borrowers only.
With desperate economic times there increases the number of fraudulent applications that are meant to cheat the financial institutions.
Some of them are so precise that it is hard to tell if they are fraudulent, even to the trained eyes of experienced bankers. Been in the line for so long even we sometimes have a hard time recognizing them, but we eventually do. (Please look out for my future posts on case studies explaining this issue).
Therefore, if businesses are legitimate and genuine there are always ways for them to obtain financing from the Financial Institutions but some knowledge on the matter of finance is required as how do you expand your business if you are unaware of the basic financial fundamentals?. By understanding these fundamentals is when you are prepared to be BANKABLE!
MORAL OF THE STORY
Nobody is as unintelligent as you perceive they are. All financial institutions are so busy vetting through the fraudulent cases among the genuine ones that the time frame of processing becomes exhaustive and long, as how you present your papers are important. How you present your company and its financial needs is the main difference of how the Financial Institutions view your application against the others.
So please just don’t apply for loans without knowing what you need as remember a LOAN IS A LIABILITY!. It is not your money to have fun with. It is the basis of improving your business to generate a higher income for you as a director/ owner to have fun with.
So understand your business, understand what you need and present how you are going to make that happen! That is what all financial institutions want to see before they evaluate your application / proposal seriously. Since, you can’t expect anyone to take your business seriously if you yourself are not taking it seriously.
Please look out for my other posts where I would be giving actual case studies of how the above had affected some of our clients as well.
Till then please have a Profitable Time Ahead and All the Best Always!