Securing a bank loan is not always easy for small and medium-sized enterprises (SMEs), and even more so during challenging times. Although they account for 94% of all companies in the UAE, bank lending to these firms represents only 4% of total loans, according to government sources. In fact, out of a total of about 300,000 SMEs, less than one third are considered eligible for banking services, or “bankable” at all.
Nevertheless, whether it is to secure funding, trade finance or working capital, an SME will always at some point need a bank’s support. Convincing a banker can be a tricky exercise for firms of this size, but provided they are well prepared and have a solid understanding of how banks consider applications, their chances of getting a positive response can rise significantly.
This was the main message business people received during the SME Academy’s first workshop, a new training programme launched by the National Bank of Abu Dhabi (NBAD) for SMEs. “Understanding how banks analyse financing requests, preparing the numbers, and knowing how to present a business in the right way are critical skills”, said Zak Abideen, one of the Moody’s trainers who were leading the workshop. “It is possible for SMEs to get finance in various forms indeed but there are key areas where business owners need to focus in advance to avoid common pitfalls in front of a banker”, confirmed Nilanjan Ray, Managing Director of Global Commercial Banking at NBAD.
Here is a list of the 8 most crucial things SMEs need to consider in order to be more “bankable” - drawn up with the help of Moody’s and NBAD professionals.
As in most things, Fail to Prepare, Prepare to Fail. “The first half an hour is crucial. Studies have shown that it takes only a fraction of a second to get a first impression of somebody and categorize him or her,” according to Mr Abideen. “The way somebody is dressed, the way they present themselves and their business, all of these things matter.” Think of where you can or want to meet: there is a difference between meeting in the comfort of your own premises, in somebody else’s office, or in a neutral place like a restaurant or a coffee shop. Remember: business is often discussed over meals, and eating tends to increase our openness to new ideas. “Part of what convinces me is also a general feeling when we meet the owners of a company”, said a a senior Relationship manager at NBAD. “You can have a great company which is doing very well from a financial perspective, but at the end of the day, if you are uncomfortable with the integrity of the owners, it does not matter. It’s a no-go.”
As part of your preparation, agree the 3 things you want your banker to remember. “Studies have shown that most of us focus best on a maximum of three messages,” according to Mr Abideen. “So, what do you want your banker to think, feel or do differently as a result of your meeting? Think about the justification for each thing and prepare one example of how this works, or what it means.” Following a structure will help you regulate the overall pressure and perform more effectively in front of your banker. Also feel free to ask many questions about the next steps to be taken as well as the process of approval. Don’t leave the room until you have all the answers you need.
ID documents, a trade license, proof of income, partnership agreement, cash flow forecast, annual audited financials,… long is the list of documentation that SMEs are asked to provide. The first reason why banks meticulously follow what they call “Know Your Client” (KYC) procedures is because the banking sector is one of the most regulated industries in the world. Many well-known international banks have been recently subjected to hefty fines for not complying with the rules. Banks are required for instance to make sure that there is no money laundering and that none of the parties involved in a deal is financing terrorism or doing business with an embargoed country. In these areas the hands of your banker are tied and failing to provide the required documentation will only lead to delays or rejection.
“Every business faces risks. Banks are not risk-averse since they ARE in the risk acquisition business, but only risks that they can understand”, said Mohamed Mahari, a Credit trainer at Moody’s. “They WANT you to be a good risk for them to grow their business while you grow yours.” Therefore, the more information you give, the more the bank understands your risks and the easier it will be to obtain an approval. Recognize the risks and be ready to explain why they are manageable and acceptable.
There are 3 types of risks that banks are looking at: business risks - arising from the day-to-day operation of the business in its sector of industry and macroeconomic environment; financial risks – arising from your financial health, cash flow management, sources of funds, quality of your assets and structure risks, which arise from the group structure or the particular structure of the deal.
Many companies negotiate contracts with clients and suppliers without looking into how the business environment and their business model will affect them. Banks don’t like concentration risk – for example, when you only have one supplier or one customer comprises the bulk of your annual turnover, no matter how big that customer is. Try to establish a diversified supply base, and where you have customer concentration, show the banker what you are doing to diversify your customer base, or why that one large customer will continue to choose you, rather than your competition. Are there alternative suppliers to meet your production targets, and avoid costly stock-outs at your facilities?
SMEs often focus on numbers instead of quality. Do fully understand from where the cash is coming in, why delays happen. When SMEs have done a good job in analysing their own clients’ track records or general health, they can look more convincing in front of a banker.
Moreover, are there any risks related to your industry in general? Right now, banks tend to have little appetite for real estate - especially hotels - construction, green field projects or electronics. “Banks prefer trading companies because they know the assets, the flows, thing are generally clear,” according to Mr Al Mahari. In Dubai, 73% of SMEs are trading or retail companies, compared with 16% in the services sector and 11% in manufacturing.
One of the main reasons for rejection is the lack of audited financials, which makes assessing creditworthiness extremely challenging for banks. Less than 23% of SMEs in the UAE have any kind of audited financials. As a result, they are critically unaware of the true performance of their business and are sometimes exposed to excessive financial risk without even knowing it. For a one-off, some banks may consider such clients if they are banking only with them, which gives them a prime idea of their strengths, but for most institutions this is just a deterrent.
Even if SMEs cannot afford one of the big four auditing agencies, banks need reliable data. They get dozens of applications every month but many SMEs just don’t keep their financials in order,. When you are dealing with banks you need to have fully audited accounts. SMEs need to invest in a professional team and in the right software. There is a lot of technology available nowadays. Seriously, it makes a huge difference.
“If the client appears as if he is hiding some information,, it’s a no-no for me”, said a relationship manager at NBAD. Many times what a client tells a banker can be verified. Don’t try to say that you are not banking with any other bank if you are, for instance. A banker just needs to pull out the Central Bank’s records to find out the truth about a client’s real exposure. Such discoveries can give a bad feeling about a candidate. Bankers need to trust their clients and get the full picture in order to help them with the relevant product and advice.
Remember : the person in front of you is not the only person to convince. In most banks, relationship managers need to convince their own management and/or a credit risk team who will look at your application from another perspective. So the more information and clarity you provide, the better.
“Banks will never understand your business as well as you do,” Mr Abideen repeated during his presentation. Explain what you do, and why your customers buy from you! Banks need to know who they are entering into an agreement with, which parties they are taking a risk upon and what the finance will be used for. To save time, be ready with the answers to all these questions, and support your arguments with a business plan. It should include the nature of your business, the details of the activity, the product, the clients, the suppliers and the geography.
According to Nilanjan Ray, “The major information to be provided in a business plan include a detailed projected cash flow and financial aspects of the expansion plan, the schedule of use of funds provided, and at least two years of audited financials. It should clearly show how the expansion for which a loan is required will add value to business in terms of market share and financially.”
A bank needs the cash flow forecast to see if you will be able repay your loan on time. Whatever your business model, show all the factors that will protect your cash flow in addition to the strengths of your business.
SMEs often think that the only benefit they can get from a bank is a loan. In fact, there are a many other facilities available and money is not always the solution. Banks have helpful structured products, such as invoice discounting, for instance where an SME can come to a bank with a sales invoice to be paid in 60 to 90 days, and based on the credibility of the payer, the bank can lend up to 80% of the due amount in advance. This type of facility is a way of significantly improving working capital and cash flow position. “Our model for the SME segment does not only focus on lending,” confirms Nilanjan Ray. “We see a significant part of profitability being derived from flow businesses such as foreign exchange transactions and trade finance, investment, payroll processing, etc.”
For more information on the SME Academy:
"15 crucial marketing tips for SMEs"