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The first conversation in the bank: what kind of homework is necessary?

2018-05-17
Mindaugas Plečkaitis
Head of Šiaulių Bankas Kaunas region
 

Most likely, many will agree with the statement that the first impression is very important, and often decisive. This statement is relevant not only in personal life, but also in business relationships, and especially if you are going to apply for a business financing for the first time.

The company seeking to receive financing must meet certain requirements of the bank: starting with the company's financial indicators, ending with collateral security. Mutual trust is also important in addition to these requirements: if during the first conversation the manager or owner of the company is able to present his business, reasonably justifies the business idea and the need for credit, his opportunities to receive funding will be higher.

The first conversation is needed to present your business and plans. It is important for the bank business client consultant to hear from the head of the company the situation of the company, learn more about the business experience of company executives and owners, understand business plans and the need for borrowing. So, for the first meeting with a banker, it is worthwhile to prepare high quality homework.

It is in the interest of the Bank that as much clients as possible received funding and could expand their business, so it is important to explain on what criteria we appreciate the company's ability to secure financing.

How do we rate your business?

Before addressing a bank, an entrepreneur should draw attention to three key criteria taken into account by the bank before making a decision on financing.

The first criterion is the reputation business experience of the owners and management. We need to know how the company is doing now and what its future plans are, so the second criterion is the assessment of the company's operating and financial situation and prospects. For us guarantees are important, so the third important criterion is the collateral.

Of course, if all these three criteria meet the requirements of the bank, the company's chances to get financing are high. True, each company's application is analyzed individually, so even if one of the criteria raises questions, we are talking with the company and are looking for solutions. But how businessman has to prepare to meet the bank's criteria?

Important: experience and reputation

Experience in business is an important advantage, and if a company is run by managers with much successful business experience, then it's likely that the company has many opportunities to grow, as the experienced managers understand the market situation, competitive situation, are well-versed in management principles, and can effectively manage the company. If the company has a strong backing of experienced shareholders, this is also a great asset. Equally important is the attitude of the owners of the company: their attitude to business, their knowledge and reputation.

We also take into account the reputation of management: overdue debts with suppliers, employees, state institutions, litigation is a dangerous signal that management is not capable of managing business responsibly.

Banks also evaluate the experience of senior executives in previous business. The fact that the manager held important positions in a company that has been operating for a long time in a loss-making, ineffective way is not a plus for a credit application. Obviously, if the company's activities were determined by objective reasons (for example, the economic crisis, affecting the general economic situation), this will not interfere with obtaining a loan.

And what about businesses that do not have experienced owners and managers? It is customary in the world, to finance business start-ups at the start-up stage with personal, venture capital or private investor funds, or can use lending to start-up businesses at a bank.

Important: business situation and prospects

It is important for the bank to understand the business: starting with the history of the company's operations, current situation and, finally, business perspectives. Therefore, in preparation for the conversation with the bank, the company must get ready for presentation of its business. It is not necessary to know all the exact numbers by memory, it is enough to explain the current situation, challenges and goals, to substantiate the business idea reasonably.

Understandably, business has to provide supporting documentation: the decision of the bank will require information of three years. The company's balance sheet data will show whether there has been a debt, or a company has accumulated capital. The profit and loss statement will reflect the financial position of the company. The loss does not mean that the company will not receive funding, simply the manager will have to explain the reasons for the loss reasonably. It is advisable for a financial manager to be able to explain the financial indicators at the meeting along with the head.

The company's perspectives will be based on a business plan that will assess the company's capabilities, competitive environment, instruments for market penetration, financial projections. The head of the company should be able to substantiate and explain the business plan, be prepared to answer questions of concern to the bank.

It is important to emphasize that “homework” is primarily needed not for the bank, but for the company itself. Thorough business analysis, critical judgment helps you to better gauge the real business situation, avoid hasty decisions, and maybe see the previously unseen business opportunities.

Important: what should I know about the collateral?

Naturally, during the first conversation the manager of the company will have questions about the possible collateral. Therefore, before talking to a banker, the company manager should already be ready to answer this question. Better yet, if the entrepreneur during preparation of the “homework” in advance consults with the property appraisers for the possible value of the collateral.

Often, corporate executives too narrowly assess collateral opportunities. Traditionally, it is perceived that a suitable collateral is only a long-term asset, first of all, real estate. In fact, not only buildings or plots can be used as collateral, but also various movable assets such as production equipment, vehicles or computers. What's more, it is worth knowing that the bank can also deem as deposit the stocks of goods or contracts with customers, which specify the specific obligations for future orders.

Business should also think in advance about the possibility of partial project financing on its own. It is recommended to have 20 % part of your own funds from the total amount of credit.

By the way, in the absence of sufficient collateral, it is worthwhile to seek out a guarantee with the bank, for example, Invega, InnovFin guarantees allow reducing the share of the collateral for the company to sharing the financing risk for the bank.

Waiting for a bank decision

So you prepared your homework and came to the bank with an expectation: you probably want to know what is the probability of getting funding? It is almost certain that your business will be funded if you have very strong evidence of at least two of the three criteria listed above and you have explanations or arguments about the shortcomings of the third criterion.

It may be that the bank will refuse to finance your business - in this case, it is useful to ask and note what the bank estimates as unacceptable or hindering the provision of funding. This should be taken into account and focused in addressing issues and doing homework in the future.