Modern business often requires a help from commercial banks. Companies that are financed only from their own sources are infrequent. Understanding the banking business, the process of loan approval and supply of banking products on the market were frequent problems to which business entities face in their business.
Which banking products exist? Which one suits our needs? Which indicators raise credit rating? How to interpret the price od banking products (what is the nominal, and what is the effective interest rate, which are the hidden costs of loan approval…)? Which bank to choose? Why bank needs that amount of paperwork and answers on questions about our business? Theese are some of the most frequent questions that matters business owners when they have to decide which bank product to choose.
Which banking products exist?
First association on bank product is the short term and long term loan with monthly annuities. Except monthly annuities, one of the most popular loans is Revolving. Revolving is the bank product that is being renewed every year and that not includes monthly annuities. When you withdraw the funds from revolving you only pay interest until you return the principal. This is good for companies which have longer payment deadlines related to its customers, so this bank product helps them not to endanger liquidity while they are waiting for payment. Annuity loans are recommended in case of financing a certain investment for which exist a clear plan of cost-effectiveness. In case of annuities loans the important thing is grace period. Grace period is a period in which your principal is stationary while you pay only the interest. Banks usually approves 3 to 6 months of grace period, so you have to plan your finances according to that. The basic rule of the bank in case of client financing is that investments in fix assets are financing from long term sources because they gradually redeem, while investments in current assets are financing from short term sources. One of the best banking product is framework credit line. In case of framework credit line you can arrange several types of banking products (short term and long term annuity loans, guarantees, revolving…). This product banks usually approves only to the companies with high credit rating. The big advantage of this banking product is flexibility within which you can more easily implement your business plans.
Which indicators affect a better credit rating?
Companies need to build their credit rating in time in order to satisfy their needs and to implement their business plans and provide sources of financing. Even companies that are currently financing from their own sources should use at least some credit product. In this way, they create a credit history which is very important when bank analyzes companies creditworthiness when they need a loan. Also, one of the useful things for improving the credit rating is the conversion (share capital increase) of undistributed profit into basic capital. This transaction implies great security for banks that the company will provide additional liquidity through this transfer, because you cancel the distribution of profit and withdrawing the money from the company in favor of the part of assets transferred to the basic capital. There is also an option in which you commit to the credit contract that you will not distribute the profit for a certain period of time.
Most business entities in Serbia do not have any assets that could be the subject of a mortgage when taking a bank loan, which would make much easier to take this type of financing source. If a business entity does not have physical assets, it should focus on building a credit history or finding the alternative collateral. One of the most popular alternative collateral is trade receivables. An option which the bank always chooses is taking company and personal promissory notes of the owner. If only promissory notes are collateral, company owners need to know which banks to choose and potentially avoid giving the personal promissory notes to transfer the complete risk to the property of the company, and not to owners.
Which bank to choose?
Every bank has its business logic (business sphere) and interpret the credit rating on its way, so we need to know which bank to choose according to our business need. Some banks are focused on financing the agriculture or IT industry, some banks are dedicated to big business entities while others cooperate with small ones. The period of existence of the company is an important factor because most of banks do not take into account companies that operate less than 2 years or have less than 2 financial reports published. If you do not meet this criteria, you should contact banks that have a separate sector for startup clients (companies up to 2 years of existence). In this case, the approval procedure is a bit longer, but there is the possibility of getting the necessary funds and support in the early period of company development.
How to interpret and compare the cost of banking products?
When credit advisers talk about interest rates, they usually speak of a nominal interest rate. The interest rate you need to pay attention to is the effective interest rate. The effective interest rate is the final price of a bank loan including all costs (nominal interest rate, loan processing costs, line activation costs…). As for the price of banking products, they vary. You should negotiate with banks as with regular customers and suppliers. It happens that large banks ignore clients who run the business only through them, thinking that you will not look for offers and giving you more unfavorable prices for banking services. We took part in negotiations when banks gave much better conditions when they saw offers from other banks. The right information and contacts will provide you a better market conditions and more adequate banking products. Be aware that all aspects are subject of negotiation with a bank, from nominal interest, early repayment fees, loan approval costs to the withdrawal/loan repayment.
Responsibility pays off
Banks appreciate the regularity of accounting records. Credit advisers, when processing credit requests, require extensive accounting records (customer cards, suppliers cards, given/received advances, trial balance, fixed assets register…). With more transparent accounting records, you will be able to clarify business changes and trends to a credit adviser. Pay attention to the preparation of the required documentation and records in order to speed up and facilitate the process of approving the credit request. If regular and up-to-date documentation is missing, you will extend the entire process of approval and you will have the feeling that the bank is constantly looking for additional documentation. To prevent this, get information about necessary documentation and deliver it at the time, and your bank will appreciate it, because responsibility really worth.
If you need our assistance in selecting the appropriate banking product, choosing a bank or collecting and analyzing commercial banks offers, feel free to contact us at office@findev.rs.
