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.
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.
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; 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 directly with; they’re 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.
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 businesses are 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 Need 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.
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.
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.
It is best to set up meetings with more than 1 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:
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.