NOV. 2012
Choosing the right option: Debt v/s Equity
Debt or Equity what would be the best
option?
 Deciding between equity financing or taking on a loan is a
challenge all SME owners face. Should you go to a bank and
apply for a business loan? Or should you look for an
investor?
Building a sustainable relationship with banks
Key steps
 Building a Business Case
 Knowing your need
 Understanding your business risk
 Role of finance manager/auditor
 Presenting your case
 What can the bank do?
 Advisory role
 Simple and transparent process
 Need based product delivery
Know your needs
Inventories: Raw Material /
Finished Goods
Receivables / Payables
Asset Purchase / expansion
Understanding Business Risks
# of
Business
Cycles
witnessed
by SME
Client
Highly
susceptible
to external
environmen
t
High
dependence
on
infrastructur
e&
government
Regulations
Industry
Bargaining
Power with
buyer /
supplier
Internal
environment
-Finance
- MIS
HR
Sales Concentrati
on risk (Too
Less) /
Maintenance
Risk (Too
Many)
Role of finance manager/auditor
 Develop internal controls in the business.
 Identify business challenges and potential
opportunities for greater efficiency and results.
 Identify potential financial risks eg. liquidity in
the business.
 Detailed analysis of financial data and its underlying reasons
 Periodic Reporting to Banks.
How to present your case?
 Assessing the suitability of bank capital as a source of funds
for the business.
 Matching business needs of capital with different
products and services of the banks.
 Preparing an thorough application for bank
finance.
 Share a detailed utilization plan of the facilities requested
 Have a mechanism regularly update the bank of material
changes to the business
What do banks look for ?
 Banks are in the business of
lending and risk sharing
 Banks
seek
information
which
is
quantifiable,
verifiable and sustainable
 Different banks based on
their preference and internal
know-how define and operate
in target markets of their
choice
 Lending is based on a variety
of factors which the bank
seeks to asses
Sales /
Turnover
Criteria
# of
Employees &
Target
Segment
Industry
Asset Size
Criteria
Target
Market
Cause for concern
Absence of reliable information
Inadequate accounting & financial statements
Lack of proper feedback/references from market
High Risk Perception
R
e
a
s
o
n
Historical performance unavailable
9
• Length of
time in
business -
• Profitable
now
• Financial
statements
available
• Projections ?
• Business Plan
Risk Position
• Does
company
operate in
target
industries
Financials
Screening Criteria
Typical approval process in banks
• Security
offered for
loan
• Minimum
owners
contribution
required
• Maximum
Ratio of debt
:equity
Banks Disbursal Process
Conditions
precedent to
disburseme
nt
Representati
ons and
warranties
Financial
and NonFinancial
Covenants
DOCUMENTATION COMPLETE