How to prepare for applying for a LOAN FOR YOUR BUSINESS NEEDS?

Is the application a difficult task and what do you need to know for the process to be successful? 

Continuing from the above, it is highly likely that if you apply for a loan and do not prove that you have a high enough credit rating (i.e., one that the bank believes you will cope with servicing the future loan and will not go bankrupt), the bank may refuse to grant such a loan. In such cases, accept it as a healthy refusal and as a signal that something needs to be improved in your processes first before trying again. 

The key in this process is to know the thinking of creditors and to be aware of your 5Cs, which the bank looks at. The five Cs of credit analysis are Character, Capacity, Capital, Collateral, and Conditions. 

These indicators are used by creditors to assess the creditworthiness of the future borrower and include an assessment of factors such as the borrower’s reputation, income, assets, collateral, and economic conditions affecting recovery. 

In addition, the level of assessment of these factors affects the interest rates and conditions of the loan, to the borrowers with stronger credit profiles being offered more favorable interest conditions compared to those with weaker credit profiles. 

What does each factor mean in practice and how does it affect this? 

• Client profile Character - The first C of credit is Character. This factor refers to the reputation of clients and their credit history. To assess their ability to repay a loan, credit teams usually use already collected information. In Bulgaria - this is the so-called. CCR /Central Credit Register/. What they are looking for as information is a history of payments. These are any unpaid debts back in time. Also, the client’s credit rating is checked, such as past bankruptcies or property seizures, and any legal court decisions against the client, incl. bans and seizures. Character is a critical factor as it helps credit institutions determine the level of risk when granting credit. As a client, if you have a good credit history and a high credit rating, your creditor will consider you less risky, and as such, the likelihood of repaying the loan on time and according to preliminary agreements and conditions is key. 
• Capacity - Capacity means whether the future borrower has enough funds to repay the funds forward in time. If the client has experienced unstable cash flows, then the credit teams think twice before increasing the credit line. Sometimes credit teams also follow other indicators to understand the client’s financial situation, acquisitions, employee stability, especially key and managerial staff, etc.
• Collateral - Collaterals are in the form of a mortgage on real estate or a pledge on commodity-material stocks, movable property, bank accounts, future receivables from sales, and others. If the client can provide enough ‘collateral’, this increases the possibility of obtaining a higher credit line, as it acts as a parameter of confidence for the credit management teams. Most credit institutions require ‘collateral’ from high-risk clients or those who do not have a long financial history /newer companies/, to avoid accumulating bad debts for their business. 
• Capital - Capital includes financial and non-financial assets and credit teams get this information through financial statements. They serve to determine the net worth of clients. They will also take into account any investments, including future ones, which could be used as collateral for the loan. Capital is important because it gives credit teams a measure of security. As a client, the more capital you have, the less risky the loan is for the creditor and the more likely you are to get favorable conditions in negotiations.
• Conditions - Conditions cover the current financial condition of the client, which can be measured by analyzing the company’s financial statements, cash flow, balance sheet, and income statement, and sometimes other reports and references. In addition, credit teams review macroeconomic conditions, studying the geopolitical situation of the country, economic conditions, and the client’s industry. This is done to assess how changes would affect the borrower’s activity and whether there would be a risk that he would not be able to service the loan.

Keep in mind that the list is not exhaustive and you can always expect inquiries for additional information or documents. However, it is good to have collected the following information in a suitable form to provide at the beginning. This builds trust in the credit institution and increases the chance of reaching a solution that works for your company:

• Financial reports /Accounting/ for three years back. These include the Income and Expense Report, Balance, Cash Flow Report, Capital Change Report, etc.
• Preparation of a Business plan with at least basic information - who you are as a company, what you do, information about the team and its experience, history of your sales, markets you already own and of course future development - what you expect, where you will continue to develop, what challenges you have and how you will cope with them. It is good to pay attention to the influence of the external environment - such as geopolitical situations, emergencies in the country or the world, if any, etc. the more specific information you present - the better you will be building trust in your creditor.
• Of course, don’t forget about the financial numbers and how your future flows would look like, such as sales, expenses, investments, return, cash flow, etc. Here, in addition to the standard accounting formats, additional references are allowed, which confirm the overall financial numbers.
• In case the activity requires a licensing regime or the future project - provide this information in advance, so you will show that you have prepared properly and have researched risks related to licensing regimes, as well as that there is no concern about closing the business due to non-compliance with the legislation.
• Pay attention, in case it would be relevant /to production, warehouse, and transport activity/ and to the regime regarding the impact on the environment and what measures you have taken.
• Sometimes, if the business is smaller, they may ask to review the financial condition of the business owner. This is done as an exception, if the business itself fails to meet the bank’s collateral criteria, for example.
• It is possible to ask for co-debtorship with other operating businesses again, if there is a risk based on the above assessments. This is done solely to secure in case of problems with the repayment of the loan.
• In most cases, they will ask you for current financial statements - i.e. financial statements for a given month /usually the closest to the date of application/ from the beginning of the current year. It is good to be prepared and to reflect your transactions and accounts on time, and to have or be able to quickly prepare interim reports.
• Don’t forget to check if you have any unpaid obligations to the state, as this can also be an obstacle in the process. Get your Current Certificate of No Obligations from the NRA.
• Think in advance if you have the opportunity to choose in which currency the loan should be, as well as the reference interest rate. This is key from the point of view of future costs for servicing the loan. Whether revaluation will be required /each such is an additional cost from the movement of the exchange rate/, the movement of the reference interest rate how stable it is and how it changes /how fixed the rate is also important/. If you have clarity, you can calmly share your desire with the credit inspector.

The list is not exhaustive and depending on the need and purpose of the loan, other information may be required. 

The key is when entering even at the first conversation with a credit inspector to be prepared and to demonstrate clarity in your goals, as well as with confidence to explain what you would use the funds for, as well as what return you expect and when. 

⇒ And don’t forget something very important - after the absorption of the funds, continue to follow all good practices so far, as well as maintain the promised indicators and commitments to the creditor. Keep in mind that if there are no emergencies, banks do monitoring/review the condition of the company and the process of servicing the loans at least once a year. In certain cases, it may be more often. It is done to be sure that things are going in the right direction. If things happen in a good way, there is a possibility to improve some of the conditions. However, if things are not going well, the bank can require corrective actions according to the situation. 

When choosing a lending institution, I strongly recommend in addition to the preparation, which I wrote about above, to collect at least three offers from different institutions. It is good to notify them at the beginning that you will do it. When comparing the conditions, look at both the financial parameters of the loan itself, as well as all fees, including those for servicing the accounts and transactions, mandatory and additional conditions of the banks. Also evaluate the communication with each institution - how things happen, if there is a need for assistance how easily it can be sought, and how they react, the competencies of the credit inspector, the whole tone of the process happening.

Author: Galina Vankova, Ethical Finance GV LTD

If You need additional information or help, do not hesitate to contact us here.