Borrowing from banks

Borrowing money from a bank can be a fairly complex and scary proposition for most people, particularly if you have not tried it before.

Of course, for established entrepreneurs, seasoned CFO (chief financial officers) of large corporations and high net-worth individuals, borrowing money from a bank can be a breeze. As a matter of fact, if you happen to belong to this elite category, the bank officers will be the ones chasing and cajoling you to borrow money from them!

It’s quite amusing if you think about it. You go through the hoops when you need them, but you can sit back and relax and be amused when bankers go through their song-and-dance routine when you don’t need them! I guess this is where the charming reputation of bankers being fair-weather friends originated. A kinder explanation, however, is that it’s just human nature.

Why do banks behave like this? Well, the short explanation is, banks primarily make money if they are successful in lending and collecting back the money that they borrow from other people. So, remember, they actually want to be convinced that you are credit-worthy.

Contrary to the popular notion that you can only borrow from a bank if you have hard collateral (preferably real estate) to offer, the first rule is to demonstrate that you have the capacity or cash flow to repay the loan.

Before a bank lends you money, it will first want to make sure you have the ability to pay it back plus interest.

How do you do this? If you are an individual, show them your payslip or employment contract or, better still, your income tax payments, particularly if you are a proprietor of a family business.

The amount you wish to borrow over a certain period of time will translate to a monthly amortization of the loan, including interest.

This regular amortization is compared against your regular income. Obviously, if the amortizations are far greater than what you make or if they represent a disproportionately significant chunk, your loan request will likely not be approved even if you have collaterals to offer.

No bank wants to go through a tedious, lengthy and expensive process of litigation and foreclosure proceedings. Our judicial process is unfortunately so complex and laden with minefields that a smart defense lawyer can tie up your collection case in courts for a very, very long time.

If your regular income is not sufficient to cover the amortizations, having a guarantor with income combined with yours that far exceeds the required repayment schedule should do the trick.

For corporations, the historical financial statements duly audited by a reputable and Securities and Exchange Commission certified auditor providing a snapshot of the business is the starting point of a lending officer. He will want to see a business that has steady sales growth of its products, able to collect sales receivables and turn over inventories within a reasonable trade cycle, control its operating expenses, efficiently utilize the operating assets, has sufficient capital to sustain the business and, of course, is making money. All these are measurable through various financial yardsticks and ratios used by lending officers. If these financial yardsticks fall short of expectations, a guarantee from the parent company or major shareholders will probably be resorted to as well on the premise that the shareholders will be providing other sources of repayment in the event their guarantees are called on.

After an evaluation of your ability to repay the loan that can be objectively measured, the next step is to have a handle of your character which, in my opinion, is everything. This will basically entail a review of your credit history and reputation. The bank will do a credit check with other banks and the courts to determine if you have any adverse history that can be considered a red flag and, unless properly explained by a prospective borrower, be a basis for disapproval. Of course, everybody deserves a second chance, particularly if a previous default or litigation could have been due to understandable circumstances such as force majeure events. A good indicator is if the adverse loan was eventually restructured and repaid in full.

Bankers are cautious persons by nature. After all, they have a fiduciary responsibility to their depositors. Depending on the amount, tenor and nature of the loan request, banks may go beyond just evaluating the cash flow of the borrower. A personal loan for a short period can be fairly easy to secure without providing any collateral. It’s not much different from availing of a credit card facility allowing cardholders to amortize outstanding balances over several months.

Personal loans, however, that go beyond a year such as a car loan or for a purchase of a condo or a house will automatically entail mortgaging the asset to be financed.

For corporations, the pattern is similar. Short-term working capital loans can be relatively easy to secure without need for collaterals, provided the cash flow test and credit checkings pan out.

For long-term loans, however, the purpose of the request will be more closely scrutinized.

Typically, long-term loans are for expansion of the business which usually go hand in hand with capital expenditures such as acquisition of new equipment or building a new plant. In these cases, a mortgage over the assets of the business would likely be required.