MGT601 - SME Management - Lecture Handout 22

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GUIDE LINES FOR APPROACHING LENDERS – III

The prerequisites for approaching a lender which every small and medium scale industry owner should know are discussed in this lecture.

Commercial Information

Details of orders booked: If you are requesting credit to enable you to fulfill a large or profitable new contract, it is advisable to have all the documents, correspondence, quotations from suppliers, draft contracts with buyers and suppliers, and your own costing, and calculations ready for discussion. This is all the more important if your order is for export. The credit facility you obtain from your bank will almost certainly need to tie in with the payment methods that you use with your suppliers or that are stipulated by your overseas buyers.

You are strongly advised not to sign any firm contract with suppliers or customers before you have discussed credit and payment methods with your bank. The reason is simple. Most import-export business arrangements or contracts stipulate the form of payment and the credit (delayed payment) terms the buyer or the seller offer or require. Once the contract is singed it may be too late to alter the terms and this may seriously limit the scope of the facilities your banker may be able to offer you.

Business Plan: If you have an up-to-date business plan for your company, showing intended capital investments and forecast revenue and expenditure for the coming three to five years, this is an excellent document to produce during discussions with your banker or financial adviser.

If, on the other hand, you do not have such a plan, you may find it useful to draw one up. It will be of great value to you personally, apart from anything else. It will also add to your credibility when you discuss your credit request with lenders. You should be able to prepare such a plan yourself, with the assistance of your qualified status is necessary. You may also ask an outside accountant or consultant to prepare the plan for you. The outline of a short, simple but effective business plan is shown in Box 7.

An outline of a Business Plan for a Working Capital Facility
The business

  • Presentation of the sponsors, shareholders;
  • Background and history of the company, business;
  • Performance to date (key figures) LECTURE NO 15;
  • Brief outline of the firm’s objectives, strategy, and policies.

Review of past turnover and future trading prospect

  • Analysis of past year’s turnover by country, customer highlighting credit terms offered, payment performance and bad debts;
  • Analysis of firm orders received, prospects for further orders, customer creditworthiness and payment risks.

The Market

  • Survey of the market for the traded products, commodities: demand, supply, pricing, distribution, margins and profits, competition, trends.

Production or procurement

  • Summary of production techniques or procurement procedures (if trading).

Inputs

  • Raw materials required;
  • Sources, suppliers, costs.

Organization and Management

  • Internal management structure
  • Ordering, invoicing, back-office procedures.

Financial data, projected results, economic justification

  • Planned capital and working capital expenditure;
  • Requirements for short-term credit facility and payment methods to be used;
  • Cash flow of operations, transactions;
  • Projected profit-and-loss, and balance sheets;
  • Economic benefits of the project net foreign currency earnings.

Feasibility Study

Feasibility studies are usually carried out in connection with medium- or long-term projects and are consequently prepared, among other reasons, as an aid to raising medium- to long-term project loan finance. You may find yourself ready to start a new project or to expand an existing activity, and you need more capital to finance the additional capital goods required (e.g. machinery, tooling, spares and raw material). It will be necessary for you to produce a feasibility study for such projects for presentation to your banker during your discussions. You will also need to give your banker copies of draft or actual loan agreements with other lending institutions. These are important because the loan agreements may stipulate that you cannot borrow from another leader unless the loan is subordinated to them. This may mean that you cannot pledge fixed or current assets if the first lenders have fixed and floating charges on such assets. You may be limited to providing your bank with a second charge or some other, less secure, form of guarantee.

In many respects, the feasibility study is not dissimilar in its presentation to the business plan.

Checklist for Feasibility Study
The Business:

  • Presentation of the sponsors, shareholders;
  • Background and history of the company, business;
  • Performance to date;
  • Brief outline of the firm’s objectives, strategy, and policies.

The export programme and equipment required:

  • Detailed description of the proposed programme stating: buyer, goods, quantities, quality, shipment schedule, prices, shipping terms, packing conditions, inspection procedures, other formalities;
  • Details of equipment required, sources and costs.

The Market

  • Summary of production techniques or procurement procedures (if trading).

Production or procurement

  • Summary of the market for the traded products, commodities: demand, supply, pricing, distribution, margins and profits, competition, trends.

Inputs

  • Raw Material required;
  • Sources, suppliers, cost.

Organization and management

  • Internal management structure;
  • Ordering, invoicing, back-office procedures.

Eligibility for export incentives, promotional schemes

  • Benefits the business is entitled to, export premiums, concessionary loans.

Financial data, projected results, economic justification

  • Planned capital and working capital expenditure (equipment and raw materials);
  • Finance required to purchase equipment; credit and payment methods;
  • Cash flow of operations, transactions;
  • Projected profit-and-loss and balance sheets;
  • Economic benefits of the project, net foreign currency earnings.

Book recommended

How to approach banks by ITC/SMEDA

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