How to approach lenders in Bangladesh
You have explored all the means available to you to improve your liquidity (see chapter l, Assessing your financial needs). You believe you now need a short-term credit from a bank or other institution to finance your trading or manufacturing activities. Your next step is to decide whom to approach.
You should take this decision on the basis of the availability of export finance services and bank-client relationship, how you rate their effectiveness and your own experience and affinities with these institutions. There are both nationalized and private financial institutions that provide international trade finance. Foreign banks operating in Bangladesh also deal with such finance.
Talk to your banker or financial adviser before you start negotiating with your customers or suppliers. Remember that working capital serves to pay for goods and services. The type and terms of credit you obtain from a bank should be closely linked to the method of payment you use to settle your creditors’ invoices, or that your customers or buyers use to pay you.
Your bank’s motivations will not be the same as yours. As a lender, it is interested in obtaining a good return on money lent and it does not want to run the risk of not being paid. It may not want to spend time and effort discussing your needs, evaluating your company, assessing your transactions and advising you without an adequate fee for such services.
Your aim is to get the best possible advice on payment mechanisms and on the most appropriate related facilities; to obtain credit on terms you can afford and to ensure that you are covered for all associated risks.
You will want to look at all the options. Your bank, on the other hand, may want to solve your problem quickly, using techniques that are best known to its staff and that involve the least effort or risk.
You will want the bank to consider your trade transactions on their merit, be your partner and share the risks with you. The bank may prefer to avoid losing time and may simply ask for charges on your fixed and current assets as security.
On the other hand, your bank is in competition with other institutions. It will want to retain you as a customer if it considers you creditworthy and a good person or company to deal with and if you offer good growth potential.
The next sections in this chapter will examine these aspects and show how the expectations of both the borrower and the lender can be reconciled.
A. Bank’s lending criteria
There are no standard criteria for short-term credit. Banks and other lenders tend to set their own internal rules. Nevertheless, all financial institutions are bound by general regulations and guidelines established by the central bank. There is a lending limit per customer/group in Bangladesh as per section 27(3) of the Bank Company Act, 1991 that is fixed at 100% of the bank’s total capital. In case of the loan exceeding 15% of the bank’s total, as a general rule, lenders may not capital, the central bank’s approval is required. Also, exceed a certain percentage of their credit portfolio (deposits from customers plus borrowings) for export credit.
Your request for short-term credit will have greater chances of success if you can satisfy the short-term lending criteria set out below.
Market Potential. Lenders should be convinced of the market potential of the goods and services to be traded. The related market report should be to the satisfaction of the lenders. Good cash flow. As a borrower, you must show that your performance is positive and that operations are not only profitable but also generate sufficient cash to cover all commitments.
Adequate shareholders’ funds. You must not be already over-committed to other lenders, but have a reasonable proportion of your own capital in the business.
Adequate security. You will not obtain credit from a bank if all your assets are already pledged to other lenders. Usually, the letter of credit is taken as the prime security while extending short term export credit. Other securities are less emphasized in related lines of business.
Experience in trading. Most institutions like to know that you have a good record of successful trading.
Buyers’ Credit Report. The lending banks may obtain the overseas buyers’ credit report in order to ensure the realization of the proceeds from the buyers.
Good reputation and standing. Your references and credentials must be acceptable to lenders. But even assuming that your past is without blemish, it is helpful to have the backing of a reputable sponsor. This could be a well-known person in business, your trade association or even your customer or supplier. No default-borrower is eligible for a further loan from a bank or a financial institution as per the Banking Company Act, 1991.
Specific purpose. Although some lenders will be prepared to grant overdraft facilities on the basis of the security you offer, most institutions prefer to see their loans linked to specific transactions. In these cases, the transactions must be explained in full detail and shown to be profitable and self-liquidating (the money borrowed will be repaid from the proceeds of the transactions to be financed).
B. Presenting your request for a short term loan
The way you approach a bank or another lending institution is all-important. Here are a few tips. Most are simply common sense ideas, and you should always be guided by the elementary rules of courtesy and openness.
Know who you are dealing with. Unless you are already one of the institution’s customers and know it well, find out all you can about the institution beforehand. Ask those who know it ab0Lkt their experience with the institution. Seek advice from your trade association, chamber of commerce, or local federation of industry. Try to obtain a copy of the institution’s annual report and see what its affiliations are, and who its shareholders and directors are. Brochures and annual reports, normally freely available in banks and other institutions, tell you a great deal about their structure, organization, and services. Banks should also indicate their lending rates and give you a schedule of their charges and fees for services.
Give prior notice of your intentions. Always call up beforehand for an appointment or, sometimes better still, write a letter or a fax setting out briefly who you are and what you do (if the lender doesn’t know you well), how much you need to borrow and why.
Although you can conduct your transactions by correspondence, it is usually preferable to meet the person in charge of short-term commercial lending or trade finance.
Be well prepared. Your banker is a busy person and you should come quickly to the point. State who you are, what you do (unless you know each other well), how much money you need and what you need it for. Be prepared to hand over a copy of your annual report (if you produce one) or your financial statements (balance sheet, profit-and-loss account/income statement, budget, business plan- see next section) as well as a brochure on your company and its activities or products. Always make a point of stating clearly what you intend to do with the funds you want to borrow. If your intention is to finance the purchase of goods or services essential for manufacturing products for export(or the purchase of commodities from producers for export), tell your banker the whole story whom you are buying from, whom you are selling to, how you intend to pay and get paid.
It is always wise to speak to your bank about these matters before you sign contracts or agreements with your suppliers and customers or make payment arrangements.
Seek advice. Experienced bankers can guide you and advise you on the risks and dangers of various payment methods, on the most suitable ways to finance your transactions and on the security you should provide as a guarantee for your borrowings.
You should also remember to ask about hedging possibilities to cover or reduce the risks of currency and price fluctuations. But be cautious. Resist borrowing more than you need, or for too long, or at too high an interest rate. Banks sometimes propose the types of credits or payment methods that they are most familiar with, or that are the most remunerative to themselves, or that present the least risk to themselves. Ask about costs. Remember there are costs, fees, and charges in addition to the interest rate. What about front-end fees? These are payments deducted from the loan at disbursement to cover the lender’s cost of evaluating your request, assessing the risk or opening the loan account. (In Bangladesh, the practice of deductions from the loan
at disbursement is yet to be found). What are the back-office fees? On each disbursement, for instance? If the advance is applied by the bank to purchase foreign exchange or to open a documentary credit, how much will it cost?
Most institutions have standard or sliding-scale rates for their services. Never hesitate to ask for a copy and seek guidance on how these rates will affect your transaction. If there are to be legal costs, such as lawyer’s fees for drafting a loan contract or registering a charge on assets, you should obtain clarification on these matters before committing yourself to any obligation.
While avoiding “shopping around. ” Bankers will not like the idea of your shopping around for the best deal, visiting several institutions and making comparisons between them. If you tell them that you have found a better deal elsewhere after they have spent hours with you, drawn up documentation and obtained clearance from their loans committee, senior management or board, they will feel that you have wasted their time.
There is, in fact, nothing wrong in trying to get to know the banking sector and wanting the best deal. But you should avoid giving the impression that you are also talking to others after negotiations have reached the stage where the agreement is virtually finalized and awaiting management or board approval. The success of a good borrower-lender relationship is built largely on trust. Trust is developed over time and is the result of a positive experience. A banker will often prefer to try out a prospective customer by offering small,well-secured loans on a very short-term basis to see how it works. As transactions are successfully repeated, the customer’s standing rises and his or her credit improves.
When you approach an institution for the first time, bear this in mind. The cheapest lender may not, in the long run, prove the best.
C. What a bank needs to know about you
This section discusses the information lenders may need to have before they can assess your request for finance. As already stated earlier, it is good policy to be as open and transparent with your bankers or financial advisers as you can. This will enable them to grasp the full situation and to give you appropriate advice. To withhold important information, such as your possible liabilities with other lenders or the fact that you have already pledged your assets, may cause difficulties at a later stage. You will have only wasted your time and probably closed the door to future dealings with the bank.
1. General credentials
If the lender you have approached does not already know you well enough, it is best to have some general background information ready for presentation to the bank. This may include the following:
Letters of introduction. If you are relatively new in business and not yet known in your business community, you may find it worthwhile to seek the sponsorship of someone respected by other business people who is sufficiently acquainted with you to be able to give you a reference. A short letter, setting out your achievements and testifying to your good character and integrity, is a traditional method of introduction. Its effect will be positive if the referee is a person well-regarded in the business community.
Your profile. This is a resume or curriculum vitae, setting out your educational achievements, professional training, qualifications and experience in the business line, and your employment record and achievements. It is a helpful introduction to yourself and need not be longer than a page or two. If you are a newcomer to the business community, your profile will help your bank to assess your capacity for conducting trade, producing goods and services for export and managing people.
You may also want to attach to your profile any certificate or reference from former employers if you feel this will help to show up your experience and capacities, especially if the employer is known and respected and has written favorably about you [Box-II].
Brochure on your business. Do not hesitate to hand over your company brochure. This should state what business you are in, what your products are and how long you have been trading. A list of clients or customers will be very helpful. If the list is confidential, you should say so when you give it to your banker. If you are in a partnership or have directors in your company, state who they are and draw up a very brief resume on each, particularly if they have a good reputation in the business community.
has been duly registered. Always try to find out beforehand from various banks whether there are any particular eligibility criteria for which you need to produce documents or statements. The government or state-owned institutions provide special facilities for exporters. (Details of eligibility criteria of various banks may be seen in the Appendices).
2. Financial situation
A lender will most probably expect you to produce up-to-date financial information on your business. The standard financial reports you should have ready are:
Balance sheet, profit-and-loss account/income statement, and cash flow statement. In the case of a limited company, these should have been audited by a firm of chartered accountants if possible, or certified by an independent accountant and approved by a resolution of your board of directors. If these are not possible, then you may have to produce evidence that your accounts are a true and fair reflection of your financial situation.
The size of your balance sheet and the amount of equity in your business are significant but by no means the determining factors in your banker’s decision to grant you short-term credit. Your banker may be far more concerned with the transactions that the facility will finance, as shall be explained later. If your audited accounts are more than, say, three months old (that is, if the closing date of the accounts goes back three months or more), you should also have with you a recent operating statement and cash-flow statement.
Financial budget for the remaining current year and coming year. This document should show your projected sales and revenues for the current period or the coming year, as well as your operating costs and overheads. You should also have a separate paper showing your planned capital expenditure if any. Your budgeted (or estimated) revenue should be sufficiently detailed to be credibly supported by necessary papers and documents.ln other words, the figures must not simply be wishful thinking but based on firm and tentative
orders to which you may add orders anticipated on the basis of past performance.
Declaration of assets and liabilities. You may be required to provide a declaration of assets and liabilities in the absence of audited or approved accounts. Guarantor’s personal network. If someone acts as a guarantor on your behalf for repayment of debt obligations, his personal net worth shall be assessed by your bank.
3. Commercial information
Details of order(s) booked. If you are requesting a credit to enable you to fulfill a large or profitable new contract, it is advisable to have all the documents, correspondence, quotations from suppliers, draft contracts with buyers and suppliers, and your own costing and calculations ready for discussion. This is all the more important if your order is for export. The credit facility you obtain from your bank will almost certainly need to tie in with the payment methods that you use with your suppliers or that are stipulated by your overseas buyers.
You are strongly advised not to sign any firm contract with suppliers or customers before you have discussed credit and payment methods with your bank. The reason is simple. Most import-export business agreements or contracts stipulate the form of payment and the credit (delayed payment) terms the buyer or the seller offer or require. Once the contract is signed, it may be too late to alter the terms and this may seriously limit the scope
of the facilities, your banker may be able to offer you.
Business plan. If you have an up-to-date business plan for your company, showing intended capital investments and forecast revenue and expenditure for the coming three to five years, this is an excellent document to produce during discussions with your banker or financial adviser.
If, on the other hand, you do not have such a plan, you may find it useful to draw one up. It will be of great value to you personally, apart from anything else. It will also add to your credibility when you discuss your credit request with lenders. You should be able to prepare such a plan yourself, with the assistance of your qualified staff, if necessary. You may also ask an outside accountant or consultant to prepare the plan for you. Some banks even extend a helping hand in the preparation of the business plan of the potential borrowers on the basis of relevant information collected. The outline of a short, simple but effective business plan is shown in Box-12.
Feasibility study. Feasibility studies are usually carried out in connection with medium and large sized projects and are consequently prepared, among other reasons, as an aid to raising medium to long-term project loan finance.
You may find yourself ready to start a new project or to expand an e$sting manufacturing activity, and you need more capital to finance the additional fixed assets required (e. g. , machinery, tooling and spares). It will be necessary for you to produce a feasibility study for such projects for presentation to your banker during your discussions (Box-
D. Guarantees or collateral you can offer
Not many lenders will consider granting you, or anyone else for that matter, a loan %ithout security. The question will come up early in the discussions. What guarantees or collateral can you offer? The term collateral means additional security. They are guarantees you give lenders by pledging assets which they can seize and sell off if you do not pay back the loan.
There are other forms of guarantees that can secure a loan, such as an insurance policy to the benefit of the lender, or an undertaking by a third party to repay the loan if you should default. You can even obtain a guarantee from one bank to borrow from another. This is current practice if you borrow from a bank overseas. The guarantee is given to the foreign bank by a local that can more easily take a charge in your assets than the foreign bank.
The point is that, whichever way you turn, you will obtain satisfaction from a lender only if you have something to offer should you default in your repayment obligations. The most common form of security is a charge (a pledge) on fixed assets, particularly land and property. Most lenders feel that land and property are readily marketable even if this means selling them off at a price below their market value. Moreover, land and property are evidenced by title deeds and, in many countries, these titles are registered by the authorities and any encumbrance would also be noted. When an asset is encumbered, it means that another party has a valid claim on it. When an asset is pledged to a lender, it is encumbered and it cannot be pledged a second time to another party unless the two parties agree to share the security.
Other fixed assets can also serve as security: machinery, equipment, vehicles and suchlike. But it is often impractical for a lender to consider these as security because their market value is often difficult to determine; especially if they are not new. Investments are sometimes acceptable to lenders as collateral, particularly if they can be easily realized (sold). These are evidenced by share certificates of companies listed on the stock exchange, bonds, debentures, treasury bills, etc. You can pledge current assets: stocks of raw materials, finished goods, commodities for export, even receivables.
When you approach an institution for short-term credit, it is useful to have a list of the assets that you are prepared to pledge as security for the loan. If these are fixed assets for which you have the land or other property titles, bring copies with you to show the bank. If you have marketable stocks of raw or finished products or, better still, internationally quoted stocks of commodities that are not yet sold, bring warehouse receipts or inventory lists with you. If you do not have warehouse receipts, delivered by a third party and attesting to the quantities or values of the commodities stored, you can usually obtain a certificate from an inspection company evidencing the quantity and quality, sometimes even the price or value of the goods stocked. Your list of receivables is also useful, because your bank may say that it would be willing to discount some of them, purely and simply rather than lend you money.
In Bangladesh, in the case of short term export credit, collateral is not essential. A letter of credit or firm contract, if found genuine by the lenders, is marked lien and no other security is insisted upon. However, for project loans to export-oriented industrial units, the question of collateral is actively considered. A list of typical collaterals is given in Box- 14.
Financial institutions rarely lend the full value of the security taken. The reason is plain enough: should they need to sell the security because of a default in payment, the price they obtain may be less than the value of the loan. The amount of cover needed for loans varies from asset to asset. In practice, you may have to pledge assets worth around two times the amount of the loan.
Mortgage(first, second) of immovable properties: land and buildings;
>> Other fixed assets: charges, debentures on machinery, equipment, vehicles
>> Guarantees from banks, other institutions, export credit guarantee and insurance
schemes, third parties;
>> Receivables: invoices, bills, promissory notes;
>> Inventory of finished goods, commodities, warehouse receipts;
>> Investment, marketable securities.