Module 4

Lesson 1

WHEN TO BANK ON BANKS

When your company is at a turning point-whether you need to expand your

business, increase the production, or iron out kinks on cash flow-you can count on a bank
to lend you the capital you need to get through.

Business loans can provide invaluable leverage for certain turning points to your
enterprise. Manufacturers can take out loan to maintain their inventory levels, or buy new
equipment. Retailers can use a business loan to ease crimps in their cash flow or bet on
future growth. Banks offer a wide variety of terms, from single-year-short-term loans to
long-term loans stretched over 20 years.

From a bank‟s point of view, a loan to your business is the same thing as gambling
on your company‟s future; that‟s why they don‟t make it easy for just about anyone to waltz
in and walk away with instant working capital.

On the contrary: in exchange for providing the capital that you need to meet your
business requirements, banks set comparatively high hurdles for borrowers.

TYPES OF BUSINESS LOANS

For almost every type of business, there‟s a different class of business loan. Loan
products offered by banks fall into several distinct types with different advantages and
drawbacks.

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  TERM LOANS are loans with a fixed maturity date and fixed interest rates, paid
off in monthly or quarterly increments over a pre-arranged payment schedule.
Businesses take out terms loans to finance acquisitions or expansions, or
refinance existing debt.

Loans with terms of more than ten years (long-term) can be collateralized by
the business‟s assets, with payments derived from profits or cash flow of the
business.

Term loans are ideal if you intend to borrow a large, fixed amount, but
generally require collateral and strict approval procedures beforehand. Contracts for
term loans may require the borrower to limit the amount of the future financial
commitments, or demand a percentage of the profit to repay the loan.

 LINES OF CREDIT are special type of loan that permits the borrower to draw as
needed. The line of credit functions like an account that can be accessed as
liquidity problems arise, making them ideal for companies that often face crises
with their cash flow.

Depending in the terms, borrowers may be able to take out as much as they need,
or only a certain portion at a certain time. Lines of credit may be secured by a mortgaged
property, but the penalties may climb if you are unable to pay the minimum pre-arranged
balance.

 SHORT-TERM loans are usually set to mature within a year. These loans paid in
full at the end of the term, instead of through monthly payments. Because short-
term loans involve smaller-scale investments that deliver returns over a shorter
period of time.

 EQUIPMENT FINANCING is a type of loan that collateralizes the equipment to

be bought by the loan. This type of loan involves significantly lower risk for the
borrower, as you lose the equipment and not your business should you fail to
repay the loan.

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BANKS FAVOR EXISTING BUSINESSES

Many entrepreneurs assume it‟s difficult to qualify for a bank loan, and its true-banks
present long list of requirements for potential borrowers.

Banks need to be convinced that the business will be viable through the term of the
loan that its management is competent enough to ensure profitability, and the debt will be
paid as agreed. As a result, creditor banks require a great deal of financial disclosure and
record-keeping, which tends to scare off many would-be borrowers.

On top of that, bank‟s requirements favor borrowers with a proven capacity to repay
debt-meaning that existing businesses are favored over start-ups. Fitz Villafuerte, an
entrepreneur and personal finance blogger (www.fitzvillafuerte.com) explains that “banks
prefer people who are asking for loans or the purpose of expanding their business.”

“One, you can use your existing business as collateral,” says Villafuerte. “Two, your
financial statement is proof that you‟re good in running the business.”

Start-ups that approach banks for capital face a classic Catch-22 situation-they want
to borrow money for their business, but don‟t have a track record of paying back debt; but
start-ups have to borrow capital first before they can build a track record!

Start-ups without a prior track record of repaying business loans should try other
sources of capitals first-offering equity to would-be partners, for example, or borrowing
money from relatives. Start-ups can also run to a lending collective, or a government
agency, which have lower barriers to credit than private banks.

The idea is to create a paper trail of successful credit. If your track record looks good
enough, you‟ll be able to go to the bank officer with your head held high, and significantly
higher chances of being approved for a loan.

EVENING THE ODDS IN YOUR FAVOR

Even with an established track a record, entrepreneurs seeking loans may run into
difficulty; your enterprise may come under friendly fire from banks trying to minimize their
exposure to risk.

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To change the odds in your favor, ask yourself the following questions:

 HAVE YOU APPROACHED THE RIGHT BANK?

Some banks have different appetites for risk. Other banks have loan products
structured specifically to handle your kind of situation. Some other banks are
susceptible to referral from a trusted client; if you have a friend who is in good
standing with a certain bank, you may ask that friend to put in a good word for you.

 DO YOU HAVE A GOOD BUSINESS PLAN READY?

You have to convince the bank that your loan is a minimum risk. So after
you‟ve completed that loan application, you need to put in a few days creating a
good business plan.

A well researched and well written business plan displays how much passion
and dedication you have invested in your own business. “A good business plan is
like writing a term paper in college,” Villafuerte explains. “If you cannot do that, how
can you expect a bank to help you if you can‟t explain how you plan to run the
business?”

 When you write your business plan, anticipate every question the loan
office might throw at you. Use your plan to answer those questions clearly.

 Acknowledge risk in your business plan, and use your plan to discuss how
you prepare for them. Leaving out risks isn‟t a show of strength or a smart
marketing ploy; loan officers are experienced bank officials who know how
to fact-check any claims you make. Instead, be reasonable: keep
projections conservative, and make sure all statements are supported by
the numbers.

 IS THE REQUESTED LOAN AMOUNT REASONABLE?

It‟s tempting to ask for a large loan amount, but you‟ll have a greater chance
of getting the loan approved if the requested amount is commensurate with your
stated intention for the loan and your capacity to pay it off.

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 “If you‟re just opening a squid ball business, and you‟re asking for half a
million pesos-even if you have good financial records, even if you have a lot of
business skills-that would still look questionable to the bank.” Explains Villafuerte.
For the banks, the less money you borrow, the easier it would be for you to pay it.

The bank may decide on a maximum loan amount for you by using your
income to determine your capacity to pay. Records of your prior business
transactions can also provide an accurate picture of amount you really need to
borrow.

 DO YOU BELIEVE IN YOUR BUSINESS--AND DOES IT SHOW?

If you give off an impression that you believe in your business that you will do
whatever it takes to make the enterprise pay-off-then you‟ve just upped the odds on
your loan approval in a major way.

Villafuerte Recounts a time when he made the same business pitch to two
different banks, potential creditors for his business. “For the first bank, I was a bit
nervous, so I didn‟t get approved. For the second one, I was a bit more confident
with what I wanted; I was approved,” Villafuerte remembers. “I showed them the
same papers, the only difference was how I presented myself to them.”

The conclusion is clear: projected confidence goes a long way. To create an

aura of confidence, visualize a positive result – imagine how it feels to receive word
that your loan application has been approved. Visualize the end result of the loan.

Conversely, don‟t bring a negative attitude to the bank. Don‟t be apologetic.

Play down your weaknesses. Don‟t sabotage your image as a go-getter who will do
what it takes to repay you loan.

Of course, no show of gumption can ever cover up a badly-prepared

application. Do your homework, so you can answer both confidently and correctly
when the loan officer starts interrogating you about your application.

 DID YOU GET AN EXPERT LOOK OVER YOUNG CONTRACT?

Contract terms can vary from bank to bank from product to product; have a
lawyer look it over, and discuss any vague points with your loan officer.

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 “It‟s a matter of talking to the loan officer and clarifying the terms, going
different scenarios,” explains Villafuerte. “What would happen to me if I‟m late? How
much will I pay as penalty? Banks are more than willing to help you understand the
contract.”

 ARE YOU READY FOR THE LONG HAUL?

More often than not, your application will be rejected by the loan officer. Don‟t
take it personally. First-time loans are the hardest to get approved; their relatively
blank track record paints them as a bigger risk in the creditor‟s eyes. Assuming your
business plan is water-tight, and all your paperwork is in order, feel free to go from
one bank to another until you find a sympathetic loan officer.

THE 5Cs
The final decision may boil down to one or more of these five Cs:
 CAPITAL. Does the applicant have many assets within the business, or outside it? Assets show how invested you are in the
success of the business, which potential creditors appreciate. Alternatively, if you can’t play up, the bank may want to resort to
repayment through your assets-real estate, stocks, or equipment.
 CAPACITY. Does the applicant have sufficient ability to repay the loan? A potential creditor bank will order a full review of
your financial statements and personal finances; they want proof that you can repay the loan for the duration of the term.
 CONDITIONS. Are prevailing economic conditions favorable for the loan applicant’s business? Sometimes, a sound business
plan will not ensure the loan’s approval if the economic signs look bad for the near future.
 CHARACTER. Does the applicant have significant experience managing his own or someone else’s business? Does the
applicant have a successful prior record of paying down other loans,
Banks will do their utmost to paint an accurate picture of your financial background. They make look at your credit
history, nosiness track record, and legal history: red flags like mishandled accounts, delinquent credit card accounts, and past
legal cases may disqualify you.
 COLLATERAL. Does the applicant possess an alternate source of repayment? In return for a lower interest rate, a bank may
require you to place some assets as collateral. The assets may be machinery, real estate, or equipment as long as the value
of the collateral is larger than that of the loan.
For banks, talking over the collateral is the absolute last choice; after all, banks are in the business for money, not real
estate. “Even if the property’s foreclosed, it’s still the bank’s problem how they will liquidate the asset,” explains finance expert
Fitz Villafuerte. “and it’s so much easier to the lender pay you in cash.”
That’s why banks will resort to almost any alternative before considering foreclosure-foreclosed assets tend to be viewed
as non-performing assets. Borrowers are often given one-year redemption period before the bank disposes or loan
restructuring.
Without collateral, you may get a higher interest rate for your loan, or have a smaller approved loan amount, it at all.

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BANKS Qs

Entrepreneur‟s financial adviser contributor Henry Ong preps you on the question the
banks will ask you:

 How much money do you want to borrow?

You will need to state in your application the total amount you plan the loan it
can be in the form of a credit line for your working capital requirement, or in the form
of debt financing for your capital expenditures.

 Is your business profitable enough, and does it have enough cash flow, to
service the debt?

You must show to the bank that your business can generate enough cash
flow to service the monthly debt amortization. A ratio of at least two times (2x)
interest cover will be safe (this ratio is the net income before interest expense
divided by the interest expense.)

 Does your business have collateral to cover the loan? If not, do you have
personal assets to guarantee the loan?

To support the loan, your business must have tangible assets such as real
estate, inventory merchandise, or equipment. The maximum amount of loan that can
be extended to you depends on the value of the collateral that you can pledge to the
bank.

 Does your business have a reasonable balance between debt and equity?

The bank avoids ranting loans to business with an overleveraged financial

position. They consider businesses with more debt than equity risky of defaulting on
their loan payments. Consider a debt to equity ratio of one-to-one as the maximum;
any ration lower than that should be good.

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LOAN PRODUCTS GEARED FOR SMEs

Certain banks provide loan products that are geared towards small to medium
enterprises (SMEs), with comparatively low barriers to access their capital. If your business
meets the requirements these banks set, you might be able to leverage their resources to
grow your business.

*ASIATRUST TERM LOAN PURPOSE: Asia Trust‟s short to medium-term loan product,
extended to help finance permanent working capital requirements or to finance permanent
working capital requirements.

AMOUNT: Minimum of P300,000 to a maximum of P20 million, with a maximum term up to

five years.

SECURITY: Real estate mortgage, continuing surety ship of the principals, deed of
assignment of receivables, third-party post-dated checks, purchase orders and delivery
receipts.

INTEREST RATES: Depends on the prevailing market rates at the time of availment.

*BPI GROW YOUR SME BUSINESS LOAN

PURPOSE: Easy access to credit for SMEs with at least three years of business operation.
Use the loan to expand your business; raise capital to purchase, build or renovate
commercial property, even residential property for lease or re-sale; or simply refinance an
existing loan or mortgage.

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AMOUNT: P1 million minimum, with a maximum of 12 years loan term

SECURITY: Real estate mortgage or other acceptable collateral

INTEREST RATES: 10.75% for a one-year term, to 12% for 5-12 years. Interest rates are
revised periodically.

*DBP LENDING PROGRAM FOR MICRO, SMALL AND MEDIUM ENTERPRISES

PURPOSE: To assist SMEs engaged in key industrial sectors, including manufacturing,
trading, communications, computer software, transportation and transport services,
warehousing facilities, and education linked to manufacturing.

AMOUNT: Up to P50 million stand-alone working capital.

SECURITY: Real estate mortgage or other acceptable collateral.

INTEREST RATES: Prime fixed rate; with a maximum term of 15years with a grace period
of five years (for SMEs)

*LANDBANK SME UNIFIED LENDING OPPORTUNITIES FOR NATIONAL GROWTH

(SULONG) PURPOSE: A more streamlined way for government financial institutions to
provide SMEs with access to funds. SULONG is designed to reduce the list of requirements
for SMEs and lower the effective cost of borrowing capital.

AMOUNT: P5 million maximum; up to 70% working capital requirements for short-term

loans, or up to 80% of incremental project cost for long-term loans; maximum of P5 million
either.

SECURITY: SULONG may require borrower to mortgage any available business and
personal collateral, including assets to be acquired from the loan. Acceptable security
include: Real estate mortgage, assignment of life insurance, assignment of sales invoice,
assignment of lease rights in case of franchises.

INTEREST RATES: 9.5% for short term loans; 13.8% for loans up to 3 years; 14.5 for
loans over 3 years to 5 years. Interest rates are revised periodically.

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