In a start-up and growth phase, many companies need to know about the conditions they must meet in order to be granted a loan or credit. When issuing a loan, banks are primarily interested in two things: (1) the company’s debt servicing capacity and (2) adequate collateral if the company fails to service its debt. In addition, the bank needs to know as much as possible about the project for which the loan is required.
Payment ability
In order to obtain a loan, the bank must feel confident that it will be repaid. A company’s payment ability, i.e. debt servicing capacity, is dependent on the amount of cash, or easily accessible funds, it has at its disposal. The bank will therefore ask about the company’s current liquidity position, as well as about its cash flow prospects.
Collateral
In general, collateral represents assets which the lender is entitled to repossess if the borrower fails to repay the loan. There are many types of collateral, ranging from company assets to sureties and real estate. Contact your bank to check what kind of collateral could be relevant for your company.
Two tips to improve your company’s debt servicing capacity
1. Monitor your cash flows
Monitor your cash flows and make sure that payment dates are observed. It is also important to improve the quality of your cash flows. For example, if your company has only a few customers, it will be more vulnerable if your customers experience payment problems. In such cases, it might be wise to consider insuring your accounts receivable.
2. Consider factoring or overdraft facilities
A number of companies experience liquidity problems because they have to pay suppliers before they receive payments from their customers. However, the accounts receivable from customers have a value and can be sold. This is called factoring and can help ensure that your company receives money owed even if your customers are unable to pay. For example, your company can use the accounts receivable from customers as security for an overdraft facility. Factoring is the best solution to ensure swift access to money.
An overdraft facility is a line of credit linked to a corporate account. Companies can draw on the credit line up to the agreed amount. It is important to make sure that the limit is high enough. If your company experiences times with lower-than-normal income levels or if something goes wrong, it is vital to have access to enough money.
Use your bank’s expertise
In periods of tight liquidity, there are various solutions to improve your cash flow. Your bank can offer cash flow advice for your company and has the necessary tools to help you.
The bank assesses all loan applications individually. Thus. it is important to have a good business plan which includes a budget and a description of who will do what, where and why.
