What banks look for

Before detailing what banks look for, it is important to first understand that most South African banks have extremely complicated and expensive fee structures. This can make it difficult to compare one financial product against another.  

Set your expectations


The banking world has been depersonalised, and the bank manager can no longer make decisions based on his/her knowledge or experience of you as a person. Despite the advertising that portrays banks as caring institutions, the truth is that relationship banking is not what it used to be.

How banks allocate loans


In today’s world of banking, a credit committee decides whether to approve a loan or not. They are only interested in the business case, so they want to know the cold, hard facts and figures contained within the financial statements and in the reports from their industry analysts.  

Generally, the committee works with carefully researched ratios to determine which business plans are realistic or not. If cash flow and profit forecasts don’t match up with their ratios, for a particular industry, then they won’t approve the application. Banks will even go as far as to deny loan approvals to certain types of businesses, in order to limit the bank’s exposure to industries that are under strain. 

The ratios with which the banks measure finance applications and their analysis of industry trends are kept secret - this is so you can’t tweak your financial projections to fit those ratios.

There are, of course, certain individuals at a bank who you will deal with directly called "relationship managers" or "business bankers".

They do make recommendations to the credit committees on why they think a finance application should be approved, but they don’t make the final decisions. Their job is to help the business owner through the application process and to convey the decision of the credit committee to the business owner. 

So you can see that getting to know your business banker or relationship manager is no guarantee to influence your loan approval. In fact, banks actively discourage relationship managers from building too strong a bond between themselves and their business owner clients. In the event that the manager leaves to work in another bank, they don’t want the manager to take their clients with them. This is why relationship managers are often rotated between different bank branches.

Therefore, you need to shop around and find the best deal for your needs. Compare the cost of raising the finance, the interest rates and the quality of service before you make a final decision.

Banks and risk


Obviously, all banks seek to reduce the risk of lending money to businesses and people who will default on the repayments. The impact of this is that small business is considered to be a high risk and as a result, they will only consider lending money if it is secured through collateral.  

Don’t forget to read about SEFA’s Khula Credit Indemnity Scheme in the module What to do when you don't have collateral.

The most recent reports on SMME access to finance indicate that the major reason for small businesses being rejected by banks is that they are not finance ready. In many cases, this simply means that the businesses were unable to provide the necessary information required by the loan application. The moment a small business is unable to provide the required information, they are seen as high risk and the loan will not be granted.

Finfind has a finance readiness quiz that you can take. Go to the Finfind home page and select the Get Finance option.  This quiz checks whether you would be able to provide the information lenders need and if not, it offers helpful tips on how to meet the requirements.

What banks look for:


Collateral


Collateral is vital for raising finance. For every Rand they lend you, you'll have to provide a Rand's value in assets as security or a guarantor will have to stand surety for the loan. This means that the guarantor agrees to repay the loan in the event that you are unable to do so. Lenders value your assets at minimal value unless you have a property that can easily be sold.

Don’t forget SEFA’s Khula Credit Indemnity Scheme. This can be a lifesaver for small business owners as SEFA will stand surety for a large portion of the required collateral amount. It obviously comes at some cost, but it does make the finance more accessible.

The viability of the business


The financial statements submitted must show a viable business. The forecasts must be realistic and in line with those of the industry.

Affordability of the repayments


The forecasts must show that the business can afford to repay the finance and be realistic. The National Credit Act has forced lenders to be far more careful about the affordability factor, and as such you will need to produce detailed financials to prove that your company can repay the loan. In many cases, small businesses are treated as individuals when it comes to the National Credit Act and therefore you could be asked to provide personal financials as well.

A clear credit record for the business and the owners


A bad credit record is a bank finance killer. If you have bad credit, prepare a detailed, open and honest explanation for each bad credit event, and proof of how you paid it off. Banks will not be interested in hearing about your plans to repay an old debt, they need to see proof that you took responsibility and honoured the debt.

Preparing to submit a loan application


Pre-meeting preparation


Before you meet with lenders you must make sure that you have all the facts and figures available about why you need a loan, how much, how the money will be spent, the impact of the finance on the business and whether or not you can afford it and so on.  

Once you have prepared this information, you are ready to meet with the various banks so that you can compare their offerings and make a final decision as to which bank best suits your needs.

Meeting


If you have all the facts and figures at your fingertips about why the company needs the loan, then this meeting will be to establish three key things:

  • Find out whether your company is eligible for a loan.
  • Find out what documentation is required to apply for the loan.
  • Find out the details of the loan offerings, such as duration of the loan, interest rate. administrative fee and repayment schedules.
It is best to set up meetings with more than one bank. Once you’ve heard the details, you will have an idea of which bank offers the best deal. It is only at this point that you need to go to the trouble of preparing all the documents you’ll be required to submit. 

Below is a list of the documents usually requested by banks:

  • A short company profile or a brief description of the business.
  • Financial statements for the previous financial year.
  • Management accounts for the period between the end of the previous financial year and the present.
  • Cash flow forecast that includes how you will use the finance you are applying for.
  • Bank statements for the last 6 to 12 months.
  • Company founding documents (and shareholders agreement if relevant).
  • IDs and personal bank details for all directors or owners.
  • Personal assets and liabilities of all directors or owners. Be sure to include details of any personal or business sureties signed by any of the directors.
  • Details of what collateral is available.
  • Details of any personal surety contracts the directors or owners have signed.
  • Loan specific documents. Some types of loans require further documents, e.g. if you apply for asset finance, then they will want to know details of the asset you want to purchase. Or if you are applying for bridging finance, then they might require copies of the tender or contract you are wanting to finance.
Next steps:
DSBD
SEFA
USAID
BLSA
SASME
Finfind provides its services free of charge to businesses seeking finance. Our primary purpose is to link SMEs with all the relevant finance providers and finance products that match their funding needs. As a matching service, we are not required to be a registered finance provider as we do not loan money directly.