Undoubtedly, financing is sometimes essential for a business to grow, to compete in the market, diversify, reduce costs, etc.
If you run a business or own a business, and consider it necessary to obtain a loan, you will have to consider the following:
First you have to have a well defined credit scheme that your business requires. In a general way I will describe the two types of credit that there are, so that you can identify which is the one that your business requires? , and so you can request it from your bank. To the extent that you submit a more informed and complete request, you will reduce the risk of rejection and slow response from your bank.
- Short Term Credit, Long Term Credit.
Let's look at each of them, starting with the short-term one. This type of credit is designed to finance your working capital, that is, your payroll, your inventories or suppliers, your payment of taxes, your advertising. For example:
You have sold a lot in recent times and had to allocate your resources in banks to buy inventories and continue selling, but you have to pay the payroll for the fortnight, then you can have this credit to temporarily cover the payment of your payroll, while he charges everything he sold on time.
Another very common example is that you requested a lot of merchandise on credit from your supplier, to prepare for the Christmas sales. If you pay off your supplier before the 60-day period granted, it gives you a significant price discount, so you can use your short-term credit to obtain the discount.
This type of credit has a maturity of 30, 60, 90, 180 or even up to 360 days. Your bank will determine these terms according to your Financial Cycle, that is, how long your production or commercial process lasts in days, or in other words, how long it takes you between investment and recovery. You can determine your Financial Cycle with a very simple formula:
1.- Your customer account balance, among your net sales, multiplied by 360 days, to see how long it takes your customers to pay you? And determine the Rotation of the Client Portfolio.
2.- Add your inventory (in pesos or dollars, not in units) to your finished product inventory, divided by your Total Cost of Sales, multiplied by 360 days, to determine your Inventory Turnover, that is, how long does it take you to cash your inventory?
3.- Your supplier account, enter your Total Sales Cost, multiplied by 360 days, to determine your Supplier Rotation, that is, how many days of financing do you have from your suppliers?
4.- Once you have obtained your Portfolio Turnover (1), your Inventory Turnover (2), and your Supplier Turnover (3), you have to add the Portfolio Turnover plus the Inventory Turnover, minus the Supplier Turnover, to determine your Financial Cycle in days. Based on the days of your Cycle, the bank will determine the term it grants you in a Short Term loan.
Never "take" or allocate the resources of a short-term loan, to finance long-term purchases, because in the Short-term loan, you do not pay interest if you meet the terms, and it is only to finance the operation of your activity contemplated in the Financial Cycle. To better illustrate it, there is similarity in those people who use a credit card to finance a trip. After 45 days your account statement will demand the full payment of your credit card, and if you do not pay it, you will pay very expensive interest, on the other hand if you pay it in full, it will not cost you interest.
To finance the purchase of real estate, machinery, automobiles, licenses, etc., there are Long Term credits, where you will make periodic amortizations of capital plus interest.
In deciding on the amount and term of a long-term loan, the bank will rely on its generation of constant cash flow. This is as simple as determining the financing term (greater than one year) and dividing the amount of principal and interest, between the selected term, and comparing it with your net profits.
For example, if the financing requires it for 5 years, we consider 60 monthly repayments. If the principal of the loan is one million pesos, divided by 60 months, the amortizations exclusively of capital would be $ 16,666 pesos per month plus interest (it is necessary to calculate them with an amortization table). Therefore, if your monthly profit does not exceed this amount, the term or the amount will have to be adjusted to allow the real flow to cover the amortization of principal and interest.
Once you have determined, what type of credit do you require? , you will have to make a formal application to the bank.
The banks will analyze your request based on the information you submitted and based on the study of various values of your business, which I am going to cite, in order to provide you with various tips to present them, so that the bank consider acceptable and / or feasible.
The Bank will verify the credit history of your company and its owners and I will explain something to you. We are all registered with the Credit Bureau. Commonly I hear people say, do not pay and they will send me to the credit bureau, it is not true, we are all registered with the Credit Bureau, only that:
a).- There are companies or people that have a good track record in the Credit Bureau.
b).- There are companies or people that have a bad record in the Credit Bureau.
c).- There are companies or people who do not have a credit history in the Bureau.
If you and / or your company belong to the group mentioned in subsection “a”, it does not guarantee that you will be granted credit, because you may have several credits, which are effectively up to date, but you have so many that you are no longer subject to credit, because your ability to pay no longer allows one more credit.
If you and / or your company belong to group "b", first fix the arrears you have to request another one, because if the bank you intend to apply for the loan realizes that you have arrears, "it has already burned itself with this Bank". We can all present late payments, it is not a “mortal sin”, since in commercial or business life, many variables influence that force us to delay a payment, therefore, update all your payments and keep evidence documentary about it, to explain to the bank the reasons why it was delayed and, how and when? caught up.
The Credit Bureau has a history of each of your credits on time, that is, it records how and when you meet your commitments, so that your arrears, if they are not very long, may not be the factor to deny you The credit.
If you and / or your company belong to group "c", it may be a compelling reason for them to deny you credit, because you do not provide any information on your possible behavior in the face of a credit liability. Curiously, not being reported in the bureau as an accredited one is a more powerful reason to be denied a loan, unlike those who are reported.
On the Internet or with your bank, you can fill out the forms to know your Credit Bureau before the bank consults it.
Once you have identified the type of credit you require, the terms in which it requires them, and you know your credit history, I advise you to prepare a document, where you objectively reflect, what are your commercial or productive strengths and weaknesses?
You have to be the first to know your strengths and weaknesses, so that you can offer arguments to the bank in case they question you.
Fundamental part of your strengths, the main thing is the financial situation of your business, so I am going to offer you some tips to prepare your presentation.
First of all, ask your accountant for a Balance Sheet and Income Statement for each of the last three months and for the last three years, which must be presented with the signature and copy of your accountant's professional license.
The financial statements provided by your accountant should be the ones you used for tax purposes, that is, to pay your taxes. A very common problem is that companies keep two accounts; The Fiscal and the Real.. Keep in mind that the bank will loan you based on your Fiscal Accounting, since you will have to attach your latest returns, so avoiding taxes is not recommended if you do not apply an adequate fiscal strategy and attached to the law.
If your level of sales requires you to audit your financial statements by an external accounting firm, request these financial statements for the same periods.
Normally the audited financial statements contain “Qualifications” of the accountants, the qualifications are observations, so it will be necessary for your accountant to inform you of a time strategy and actions with which you will eliminate these qualifications.
Compare your financial statements in chronological order.
As a percentage, how much have your sales grown in recent years? To get a true figure, subtract the annual inflation for each year, so you can comment on whether your sales are really on an upward run. If, on the contrary, your sales have decreased, mention the real reason for this drop, it does not constitute a sin, perhaps your activity in general has presented a market or price drop in the entire sector, the important thing is that you have an objective argument to comment on it and a logical and founded strategy to reverse this trend.
It will be necessary for you to calculate the liquidity of your business, that is, how many resources do you have to meet your short-term obligations?
Liquidity is essential to support a short-term line of credit, since if you do not have adequate liquidity, for some logical reason in your activity, the credit may be destined to provide liquidity to your business to clean it up more.
Liquidity is calculated by dividing your Current Assets by your Current Liabilities. That is, how many resources do you have available to face your short-term liabilities, therefore a good indicator of liquidity is when the result of this division is greater than one. For every peso you have, you have a peso to deal with your debts.
If it is your Current Asset accounts, there are accounts related to the partners, that is, money that the partners owe the business, "clean" these accounts before requesting their credit, since it is not well seen by the banks that the partners are indebted to the company, which also affects its liquidity.
There is another formula to calculate liquidity called the “Acid Test”, which consists of subtracting the value of its inventories from Current Assets before dividing it by short-term liabilities, which is calculated to obtain a more real index or filtered, considering that for example you may have obsolete inventories that alter the liquidity of the company. If the acid test result is greater than unity, it is a good indicator.
Calculate the Leverage of your company. That is, for each peso that the company has of Capital, how many pesos it owes or has to pay. This indicator is also highly relevant, since there are companies that present such a degree of leverage that in colloquial terms it could determine that the financial owners are the creditors.
Leverage is calculated by dividing Total Liability (total debts) by Total Capital. As I mentioned, there are companies that owe more than once what they have capital, therefore, the shareholders could not be considered as the owners of the company, therefore, the result of this calculation must be less than one, so that is considered as a good indicator.
Normally banks request guarantees and guarantees, and from experience I tell you that people who request loans consider that their guarantees are sufficient argument to obtain a loan, but this is not the case. Banks do not intend to keep their guarantees, no matter how much they are worth, the guarantee is to reduce credit risk in the event of an imponderable that prevents payment, but only for an imponderable, with all its letters.
On the other hand, the guarantee has the function of covering, in case of imponderable, the repayments of the credit in case the company cannot partially or temporarily cover them.
There are other calculations that you can study, such as Interest Coverage and / or Onerous Debt Coverage, however I do not want to complicate it too much, since I consider that if you present these calculations and some comments on the decisions and conditions that you have made or have influenced your result, you can present a fairly comprehensive summary of your company.
To complete the content of your summary, where you offer complete information about your business in terms of strengths and weaknesses, you must consider the age of the business in the market, the experience of its partners, the roots with customers, the demand for your product, the innovations of its processes and products, the competition it has, the distribution channels, etc.
You know or should know your business well. For example, pay attention to variables such as:
If you depend on a single customer, it is a weakness, if your product has high competition, if your distribution channels are limited or affected by external variables, if you depend on a single supplier or your suppliers are subject to international rules and taxes., if your inputs are difficult to acquire, if there are adverse changes in the legislation of your sector, etc.
Present a "complete x-ray of your business", based on growth and weakness mitigation strategies.
Remember that the bank evaluates five "C's" of the customer.
1.- Economic Conditions, which refers to the sector where you work.
2.- Payment capacity, which you can calculate according to the information that I have just transmitted to you.
3.- Capital. The alternate capital with which the partners or the company can deal with the credit.
4.- Collateral. The quality of guarantees that are offered to support the credit, that is, the ease of being able to "liquidate" the guarantees in the event of an award by the bank, which I reiterate, is not the bank's purpose.
5.- Conduct. The client's background regarding ALL their obligations, which is observed in the credit history, payment of suppliers and taxes, compliance with laws, etc.
I sincerely hope that this article will help you to present a viable credit application, since to the extent that credit flows in our country, and to the extent that businessmen use credit better, it will be in the extent to which we present better growth rates and better opportunities for all.
