Frequently Asked Questions
Most financial institutions would have an application checklist that lists out the documents required. You should ask the financial institution for their checklist. You can use the ‘prepare your application’ tab on the website to prepare your bank application and collect the information to present to a bank.
Banks use three years financial statements to assess business trends, assess operational controls reflected in financial metrics, and make projections to determine repayment capability.
Bank finance is not recommended as a source of startup capital. Interest bearing bank finance is an inappropriate source of capital for startups. Startup businesses are usually high risk. Banks in the UAE don’t lend to startups. If the entrepreneur requests Banks in the UAE look at the applicant’s personal accounts and available collateral when reviewing a loan application of new businesses.
Business plan is a means for the bank to assess the depth and quality of ‘planning’ that undergirds the business. In a business plan, the bank obtains information regarding the business – background of the borrower, the industry, the financial position of the SME, the business projections of the borrower, need of capital, business strategies and operational requirements of the borrower.
You should prepare the business plan yourself or you can ask your auditor for assistance or get help from a consultant. Banks are a little wary of outsourced business plans.
Don’t consider the business plan as drudgery. Business plans are for the business owner. It is always a good idea to have a business plan. The need for a business plan depends on the bank concerned.
It will challenge to obtain finance without collateral. The requirement for collateral is based on the credit assessment and the applicant’s risk profile. Other factors, such as applicant’s character and integrity, capacity to repay, capital commitment and condition of the business, will also be considered.
Collateral is a covenant. The purpose of asking for collaterals is to ensure that borrowers are committed to repay the loans taken. Availability of collateral that is pledged increases confidence of the banker and speeds access to finance.
Common grounds for declining credit applications include:
- Applicant does not have ability to repay the facilities applied for
- Purpose of borrowing not in line with facilities applied for
- Unsatisfactory financial results of the applicant
- Applicant has other substantial borrowings resulting in high gearing (i.e. amount of loan is higher than capital)
- Unsatisfactory conduct of current account by the applicant
- Unsatisfactory repayment records with other lenders
- Applicant has cases which are pending legal action
- High business risk such as over dependence on single buyer or supplier
- Lack of financial commitments from business owners (i.e. not willing to commit additional working capital)
- Weak management of the applicant
- Sole proprietor/partners/directors/shareholders/guarantors etc. facing bankruptcy actions from other parties.
It is a good idea for the SME owner to ask the bank to inform him, as potential borrower, of reasons for rejection, the areas in which the borrower failed to satisfy bank lending criteria. This will ensure that the borrowers are aware of the reasons for the rejection and enable them to improve in the areas concerned for future loan applications.
Yes. Loan shopping is a way to assess direct and indirect costs of finance.
Every bank has its own credit guidelines and credit evaluation criteria. You should liaise with the bank to see what you need to do for them to reconsider your application. And then take necessary steps to meet bank requirements.
All banks review their credit portfolio and based on their assessment, may decide to reduce the credit exposure to any borrower. Banks may do this for several reasons including non-utilization of the facility or bad conduct of the account.
This right of a bank is normally provided for in the letter of offer or other loan documents. However, please maintain a relationship with bank relationship staff who will caution you about potential reductions in the credit facilities in advance giving you time to make alternative arrangements.
You can approach your bank and request them to consider restructuring or rescheduling your loan. This will usually be in the form of a lower monthly installment and extending the repayment period of the loan. You will be asked to provide the financial institution with full facts of the businesses financial position to enable them to assess your request.
All banks provide financial advisory services to businesses. Also approach your auditors for help (see auditor tab). Many management consultants assist in providing financial advisory services.
Advantages to business
- Satisfaction for the SME owner of the business about the operations and working of the business
- Verification of books and maintaining up-to-date records
- Independent opinion about business condition
- Audit is a moral check on the staff not to commit any irregularity
- Detection and prevention of errors and frauds
- Reliance by stakeholders like creditors, suppliers, and banks etc
- Access to capital from banks – money can be borrowed easily on the basis of audited balance sheet from financial institutions.
- Easy valuation in the event of sale of business
- Reliance by partners on business results
Advantages to the Public
Safety from Exploitation
The interest of the public and shareholders is safe and guaranteed in the presence of audit. Otherwise they may have been exploited by the management. This is the main reason for which the audit has been made mandatory for public limited companies.
Facility for Prospective Investor
The prospective investor can easily analyze the position of the company gaining through the audited financial statements of the company and can make the decision to invest or not in the company.
Satisfaction about Business Operations
In the presence of audit, the public in general and the owner of the business in particular receive the reliable statement of accounts, indicating the true financial position of the concern and they can collect result from it and feel satisfaction about it in every respect.
An adverse credit record will affect the credit evaluation of your loan application. You should discuss the matter with the bank concerned and work out a repayment scheme with the bank. Once your account has been regularized, your possibility of obtaining fresh credit will improve.