Unit 2: Working with banks
financial management, banks ]
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- When planning a new venture, and before contacting a bank, there should be an understanding with the financial department.
- Ensure that the financial tool is necessary and that the risk is as low as possible.
- Conduct a business plan for the new venture
- Conduct a bank assessment survey
•A clear and detailed business plan that reflects the needs and intentions of the business will help the bank to give the right information to select the right financial tool
Banks have become interested in co-operating with micro-enterprises, having greater flexibility in terms of lending. This is a point that small businesses should take advantage of, by working with them to make sure they have got the right borrowing solution.
A large part of the world economy is occupied by the agricultural sector. The high- level bank officials know that a small agri-business today, could become a profitable production unit as a result of making good investments. So, what a bank is looking at is whether the business plan is bankable or not; In short, if it will create revenue for the business and therefore the bank.
•Building successful banking relationships is the key to getting something more than easy lending. You get trusted advisors who can guide you to finding creative ways to raise finance.
•Consulting with a trustworthy financial institution, the micro-enterprises can be guided to financial solutions they may not have otherwise thought of, such as: smart use of credit cards, lease rather than buy equipment etc.
•Gain a clear understanding of all the terms involved so there are no surprises
•Start by looking at whether an existing product can be used, then consider modifying an existing product to meet requirements, and only consider new products or unique arrangements as a last resort.
•Banks may be eager to force enterprises to use newer products, but be aware they are less likely to be familiar or comfortable with these mechanisms.
•Always begin negotiations with high-level bank officials who have real decision making ability
•Banks may want to broaden their relationship by acquiring a share of an agency’s normal banking operations. If no prior banking relationship exists, it’s important to take careful steps when discussing future partnerships.
•Clearly define the roles, responsibilities, risk mitigation and problem-solving mechanisms and communication protocols within the partnership. Set clear levels and timeframes for service delivery.
Types of financing (1/2)
•Short-term loans: Short-term loans that most often do not require a guarantee
•Term loans: The duration of the loan is determined when the agreement is concluded. Usually repayments are made in monthly installments.
•Bank credit - line of credit: There are two types of credit of this kind.
- The first type is simple bank credit and the second is a revolving credit. In the first case, the bank and the entrepreneur have agreed on a credit amount. The entrepreneur can use all or part of the amount for the needs of the business. The credit has an expiry date.
- In the latter case, the agreement is the same as the previous one, but the entrepreneur may request the renewal of the credit after the expiry of the first agreement
Types of financing (1/2)
•Mortgages: Real estate mortgage loans are given to businesses that have real estate and can use it as collateral. There are two cases :
- The first case concerns the mortgaging of new property, such as the building housing the business. The property is the guarantee of the loan.
- The second case concerns property that has not yet been settled but can be used in part as a guarantee. The difference between the remaining debt and the value of the property can be a guarantee for borrowing.
•Inventory Funding: In this case, the loan is secured by the goods in the store or in the business, provided that they have been paid for. In these cases, creditors give loans of no more than 50% of the value of the goods.
Sources of financial support
•All entrepreneurs must know the sources of financial support available to them and how each of them fits with their business.
• One source of financial support is the capital of the company and the second source of financial support is the bank. It is very important to investigate the real cost of these sources at both economic and property level.
•Matching financial sources with business needs is very important. The entrepreneur should remember that the best source of funding is the one that meets the needs of the business at the lowest possible cost
What micro-enterprises should avoid
•A business plan than involves a high-level risk
•Mismanagement of the business
•An unreliable credit profile
All this will prevent a bank from co-operating with a micro-enterprise
Principles of borrowing
•Entrepreneurs should avoid borrowing more money than they need.
•Entrepreneurs should not only borrow because they are afraid of losing the opportunity to invest with third-party money.
•The loan should be neither too small to cover a large part of the needs nor too large to maximize the risk.