LOAN MONITORING AND MANAGEMENT OF ARREARS

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					BNFN 404 CREDIT ANALYSIS AND LENDING

WEEK 12 ASSESSING LOAN PROPOSITIONS FROM MSMEs
HATICE JENKINS

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WHY WE EVALUATE ?

•TO ESTABLISH BORROWER’S ABILITY & WILLINGNESS TO REPAY THE LOAN •TO AVOID BAD LOANS!!

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LENDING TO SMEs Bad Loans – The After Effects
♦ ♦ Substantial effort and cost in administration and recovery Remain “Alive” long after scheduled settlement date

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Demand the Lion’s share of attention at the expense of good clients.
A bad loan can ruin a business and bankrupt its owner.
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LENDING TO SMEs The Realities
♦ Owner – The key person in the business ♦ Limited information on which to base a decision

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LENDING TO SMEs Owner – The Key Person
♦ ♦ ♦ Sole decision taker No formal management structure No clear boundary between business and family finances

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LENDING TO SMEs Limited Information
♦ Past record out of date ♦ Accounts do not tell the whole story ♦ Budgeting/Planning almost never formally carried out

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LENDING TO SMEs Implications for the Lender
♦ Heavy reliance must be placed on competence and character of owner ♦ Need for investigative/detective work in establishing facts ♦ Too much analysis and number crunching does not add value to the final outcome

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LENDING TO SMEs Steps in the Evaluation ♦ Owner ♦ Business ♦ Proposed Investment ♦ Ability to Repay ♦ Security

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LENDING TO SMEs Evaluating the Owner
Things to Look for: ♦ Vision ♦ Drive and stamina to succeed ♦ Understanding of business environment ♦ Knowledge of sales and profitability ♦ Technical know-how ♦ Character
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LENDING TO SMEs Financial Philosophy of Owner 1. Financially Conservative  Risk averse  Uncomfortable when borrowing  Likes to live within his means  Does not want to pay fees/bank charges  Normally ploughs all profits back into the business
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LENDING TO SMEs Financial Philosophy of Owner
2. The Big Spender

 Takes many risks when borrowing  Optimistic about repayment prospects  Sometimes spends without considering the consequences  Feels entitled to a high standard of living  Normally takes money out of the business
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LENDING TO SMEs Evaluating the Business ♦ Competitive positions of business ♦ Financial performance and financial standing

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LENDING TO SMEs Competitive Position of Business ♦ Review of Competitive Environment ♦ Identification of risks ♦ Identification of critical success factors

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LENDING TO SMEs
Establishing Financial Performance And Financial Standing

Sources of Information ♦ Accounts ♦ Bank Statements ♦ Asset Creation
    Personal Wealth Within the business Undeclared sales Secret Deposits

♦ Confidential Information

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LENDING TO SMEs The Proposed Investment ♦ Does it make sense?  Is there a need?  What are the benefits? ♦ Is the Cost reasonable ♦ What is the financial plan?
   Own funds Loan Other

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LENDING TO SMEs Ability to Repay ♦ Striving for “Accuracy” is pointless ♦ Establish Gross Operating Income (PBITD) ♦ Establish major obligations (loan repayment, tax etc.) ♦ Check for ability to repay making allowance for a margin of error
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SECURITY/COLLATERAL Alternative source of repayment when primary source fails

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LENDING TO SMEs Security Increases in Importance With
♦ Higher risk loan propositions    New clients Start-ups Projects in declining sectors etc.

♦ Longer loan horizon

♦ Larger loan size
In general, when likelihood of the primary source of repayment breaking down is high.
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TYPES OF SECURITY TO AVOID ♦ Assets which are difficult to value. ♦ Assets which are difficult to control  small items  “mobile” assets ♦ Assets which are difficult to sell  high-tech equipment  purpose built assets
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TYPES OF SECURITY NORMALLY TAKEN BY SBA
Type of security ♦
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Advantages/Shortcomings Always required. Very effective for small amounts.

Personal Guarantee

Mortgage on immovable Highly preferable. Usually property appreciates in value. Takes very long to foreclose.

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Fixed charge on machinery and equipment Co-Ownership of vehicles
Floating charge

Realisable values difficult to predict. Easier to sell. Easy for client to alienate without lender’s consent. Easy to value. Easy to sell.
Can be very effective but very costly to exercise. Normally registered for monitoring purposes.

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GOOD LENDING PRACTICES
♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ Always visit client at his premises Do not take client’s statements at face value. Establish facts! Review accounts with skepticism Be skeptical of feasibility studies and business plans Discuss difficult lending proposals with another colleague Do not process an application if client is not ready to implement the project Always agree all loan terms with client before approval Do not be afraid to say NO Your NO must be final Do not lend if you have good security but a lousy project Do not throw good money after bad Trust your “gut” feeling
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LENDING TO SMEs Attributes of A Good Loan Officer
♦ ♦ ♦ ♦ ♦ ♦ ♦ Well developed analytical skills Business analysis Financial analysis Thorough understanding of market/economic sectors Good communication/interpersonal skills Willingness to “get his/her hands dirty” A generalist, with education and experience outside banking Sound judgement Integrity of character
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