STAGE 3: Assessment Of The Loan Application
After you have submitted all the required documents, the financial institution will assess your loan application. You can refer to the client charter displayed at the banking hall to find out the duration needed by the financial institution to process your application.
In assessing your loan application, the financial institution would look for certain basic requirements which are summarised as followsWhether the risks are acceptable based on the lending guidelines of the financial institution Your credit history with the financial institution
The broad principles that financial institutions apply to assess your business’s credit risks can be summarised as the 5 Cs which comprise of both qualitative and quantitative assessment.
The 5 Cs and their characteristics are summarised as follows:
- Your knowledge of the business, experience and past projects
- Financial standing, past repayment records, reputation and commitment to business
- Your key management and business style i.e. conservative, aggressive, prudent etc.
- Your succession plan, age and health
- Sources of capital e.g. from the shareholders of the business
Sufficiency of your financial commitment in the business (in the form of shareholders’ funds, directors’ advances and third party collateral provided by the owners themselves)
[You should ensure that you put in adequate capital to support your business and not rely solely on bank loans. This is to ensure that your business has the capacity to absorb any undue shock to its performance.
Your capacity or ability of the business to repay the loan as follows:
i. Primarily from the generation of sufficient cashflow i.e. cash received less cash disbursed for expenses incurred is adequate to service the loan. (Profits cannot be relied upon to service nor repay loans as it is a derived figure at the end of a period)
ii. Other sources of repayment
[The repayment programme will be structured in a manner that will not impose undue strain on the business.]
External influences that will have both direct and indirect effect on your business performance such as technological environment/developments, globalisation, foreign currency markets, economies of major trading partners, legislative and regulatory framework and social trends
Security offered by you to compensate/mitigate weaknesses in the earlier mentioned 4 credit factors
Financial institutions do conduct credit checks and study the conduct of the business current accounts, repayment records of their loans and trade facilities. Some financial institutions have already put in place their loan evaluation matrix in the form of scores as part of their credit evaluation processes.
Approval Of The Loan Application
Once the financial institution approves your loan, it will issue a letter of offer which will state the terms and conditions (T&C) under which the facility will operate. You should read and understand all the T&C therein.
Your Responsibilities As A Borrower
As a borrower, the financial institution expects you to put in place steps to manage your business so that your loan can be repaid on time. Remember that loans can be subject to periodic (e.g. yearly or half yearly) reviews and that the financial institution will request for the latest financial position or business performance and other relevant details.
Your responsibilities as a borrower include the following:
1. Maintain good conduct of your accounts:
- For overdraft facilities, you should ensure that you do not exceed the limit
- Ensure no incidence of returned cheques due to insufficient funds
- Ensure all business collections are credited to your bank account (to instil accountability/corporate governance and better cash flow management)
2. Ensure that your monthly repayments are paid promptly:
- Set aside sufficient funds to repay monthly instalments and commitments on time
- Avoid late payments by making allowance for timely payment i.e. issue cheques on time
3. Ensure that your business is efficiently managed:
- Monitor and manage the cash flow, stocks, trade debtors’ and creditors’ repayment period etc
4. Ensure proper utilisation of the funds:
- Use the funds solely for business purposes and not for your personal use
- Use the funds according to the purpose as stated in the letter of offer e.g.:
i.) Term loan for purchasing properties or fixed assets
ii) Overdraft to meet working capital requirement and not for the purchase of fixed assets
– Funds are used by the intended business and not channelled for related companies’ use etc.
5. Submit yearly audited financial statements
6. Update the financial institution on any changes in business i.e.:
- Latest management structure
- Business direction
- Future plans
- Submission of documents required by the financial institution i.e. progress report etc.
Your Rights As A Borrower
As a borrower, you would have the following rights:
- Right to have access to all information that would affect your borrowing decision
- Right to be treated professionally, courteously and without prejudice
- Right to have accurate information on a regular basis on your loan account
- Right to enforce legal action in the event of a breach of contract