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BNFN 404 CREDIT ANALYSIS AND LENDING

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CREDIT ANALYSIS AND LENDING. WEEK 11. ASSESSING LOAN PROPOSITIONS ... Bad Loans The After Effects. Substantial effort and cost in administration and recovery ... – PowerPoint PPT presentation

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Title: BNFN 404 CREDIT ANALYSIS AND LENDING


1
BNFN 404CREDIT ANALYSIS AND LENDING
  • WEEK 11
  • ASSESSING LOAN PROPOSITIONS
  • FROM MSMEs
  • HATICE JENKINS

2
WHY WE EVALUATE ?
  • TO ESTABLISH BORROWERS ABILITY WILLINGNESS TO
    REPAY THE LOAN
  • TO AVOID BAD LOANS!!

3
LENDING TO SMEsBad Loans The After Effects
  • Substantial effort and cost in administration and
    recovery
  • Remain Alive long after scheduled settlement
    date
  • Demand the Lions share of attention at the
    expense of good clients.
  • A bad loan can ruin a business and bankrupt its
    owner.

4
LENDING TO SMEsThe Realities
  • Owner The key person in the business
  • Limited information on which to base a decision

5
LENDING TO SMEsOwner The Key Person
  • Sole decision taker
  • No formal management structure
  • No clear boundary between business and family
    finances

6
LENDING TO SMEsLimited Information
  • Past record out of date
  • Accounts do not tell the whole story
  • Budgeting/Planning almost never formally carried
    out

7
LENDING TO SMEsImplications 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

8
LENDING TO SMEsSteps in the Evaluation
  • Owner
  • Business
  • Proposed Investment
  • Ability to Repay
  • Security

9
LENDING TO SMEsEvaluating 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

10
LENDING TO SMEsFinancial 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

11
LENDING TO SMEsFinancial 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

12
LENDING TO SMEsEvaluating the Business
  • Competitive positions of business
  • Financial performance and financial standing

13
LENDING TO SMEsCompetitive Position of Business
  • Review of Competitive Environment
  • Identification of risks
  • Identification of critical success factors

14
LENDING TO SMEsEstablishing Financial
Performance And Financial Standing
  • Sources of Information
  • Accounts
  • Bank Statements
  • Asset Creation
  • Personal Wealth
  • Within the business
  • Confidential Information
  • Undeclared sales
  • Secret Deposits

15
LENDING TO SMEsThe 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

16
LENDING TO SMEsAbility 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

17
SECURITY/COLLATERAL
Alternative source of repayment when primary
source fails
18
LENDING TO SMEsSecurity 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.

19
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

20
TYPES OF SECURITY NORMALLY TAKEN BY SBA
21
GOOD LENDING PRACTICES
  • Always visit client at his premises
  • Do not take clients 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

22
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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