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MGT601 - SME Management - Lecture Handout 20

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

How to Approach Lenders

You have explored all means to you to improve your liquidity. You believe you 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. 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.
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.

Your bank’s motivations will not be the same as yours. As a lender, it is interested in obtaining a good return on money lent, and it does not want to run the risk of not being paid. It will not went to spend time and effort discussing your needs, evaluating your company, assessing your transactions and advising you without an adequate fee for such services.

Your aim is to get the best possible advice on payment mechanisms and on the most appropriate related facilities; to obtain credit on firms you afford and to ensure that you are covered for all associated risks. You will want to look at all options. Your bank on the other hand, may want to solve your problem quickly, using techniques that are well known to its staff and that involve least effort and risk. You will want the bank to consider your trade transactions on merit, be your partner and share the risks with you. The bank may prefer to avoid losing time and may simply ask for changes on your fixed and current assets as security. On the other hand, your bank is in competition with other institutions. It will want to retain you as a customer if it considers you creditworthy and a good person or company to deal with, and if you offer good growth potential.

The following sections in this lecture will examine three aspects and show how the expectations of both the borrower and the lender can be reconciled.

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MGT601 - SME Management - Lecture Handout 17

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This lecture deals with the financial feasibility, flow sheets, short term and long term loans, cash flow analysis and financial cost.

Financial Feasibility

It covers the following:

Determination of total financial requirements

It can be done by preparing a financial statement in the following way:

Financial Requirement Statement:

Initial Expense Period 1 Period 2
Expense in product development ------- -------
Legal expense ------- -------
Product testing expenditure ------- -------
Marketing and technical feasibility Expenditure ------- -------
Miscellaneous expense ------- -------
Sub Total(1) ------- -------
Fixed investments ------- -------
Building ------- -------
Equipment and machinery ------- -------
Patents ------- -------
Other equipments ------- -------
Sub Total(2) ------- -------
Operational expenditure ------- -------
Material ------- -------
Wages ------- -------
Sales promotion, distribution ------- -------
Rent, interest, insurance, taxes ------- -------
Contingency ------- -------
Sub Total(3)    
Total 1+2+3 1+2+3

In making the above estimation, provision must be made for cost escalation that is inevitable due to price changes. Besides, appropriate sales forecasts should also be made to have a clear picture of expenditure. The projection could be weekly or monthly.

Read more: MGT601 - SME Management - Lecture Handout 17