EU-REPARIS is funded by the European Union and is a part of WB EDIF. BE WELL- PREPARED TO MEET YOUR BANK WHAT DO BANKS WANT TO KNOW? The bank may ask to meet with you before they can banks often had questions about the following decide whether to issue your loan. This is a common aspects of companies’ financial statements. If you practice for larger loans, with longer maturities (the can’t answer these questions on your own, talk to ‘time horizon’ of the loan). Prepare yourself for your your accountant. Ask them to explain to you how meeting with the bank, to maximize your chances of these numbers were calculated and ask them for having your loan approved. Banks will have different supplementary information, as needed. If possible, questions, depending on your particular situation. bring your accountant with you to the meeting with But based on our survey of banks, we found that the bank. CAN YOU ANSWER RECEIVABLES THESE The financials you give the bank are probably at least a few months old. The bank will want to know how COMMON QUESTIONS many of the receivables in your balance sheet have been recovered (that is, already paid by your clients). Before meeting the bank, have a list of what was paid and what is still outstanding. The bank might also ask about the receivables that are past due, and how these were accounted for. Ask your accountant FROM BANKS? about how these have been accounted for. PAYABLES DEBT AND DEBT SERVICING The bank will want a realistic picture of how much It is important to be transparent about your you owe to others. This is not always straightforward. indebtedness and liquidity. Disclose the debts you For example, say you are disputing an invoice for a owe, and the costs of servicing these debts. Banks service you did not receive fully, or was not at the noted that SMEs’ payments that are due in the short level of quality you had agreed. You might think you term to service long term loan are not well accounted do not need to enter this payable in your books. But, for, which distorts companies’ financial picture and the other company might contest you in court and makes them seem more liquid than they really are. you could end up paying the amount with interest. Banks will ask about this, however, and will calculate So, if you have such contested payables, make sure this on their own. If their calculations diverge from they are noted and explain these to the bank. yours, they are less likely to trust you as a customer. FIXED ASSETS (MACHINES, VEHICLES) AND RELATED PARTY TRANSACTIONS INVENTORY When you have a “family of companies”, your Fixed assets lose value over time, and your accountant company might enter into related party transactions, should reflect this in your financial statements (this is which basically means business between companies called depreciation). Inventories also lose value over within the family. It can be difficult for banks time, and banks may want to see your inventory to to understand the family of companies’ total make sure their value in your books is really the value indebtedness and dependencies. This knowledge for which they can be sold. For example, if you have of relationships and transactions with related computers in inventory, and a new model comes parties is crucial to understanding where control out, the old model will automatically lose value since lies. And control impacts a company’s strategy and it will be out of date. This loss in value should be its financial and operating policies. Related parties reflected in your books. If your accountant doesn’t may enter transactions that unrelated parties would ask you about your inventory, that is an indication not consider, in particular because related parties that they might not be accounting for it properly. may benefit from preferential treatment. Why should you give banks so much information? Missing information or information that is of poor quality means that banks will need to do more research on you, your company, and your family of companies. This research is called due diligence. ? Even if banks think it’s worth going through the effort, there are still negative consequences for the company. Due diligence slows down the loan application process (since it takes time to conduct Due diligence is a costly and time-consuming research). It can also increase the cost for companies exercise that banks will only conduct if it is worth (time is money), and the cost for this extra research their while. So, if a company requires a lot of due and time will be passed along to you, through higher diligence, banks might find it’s not worth giving them fees and interest rates. It may also mean the bank a loan at all. might perceive you as a riskier customer, which might result in shorter terms of loans (maturities) and higher demands for collateral. In the end, giving the banks less information, or information that is not reliable or transparent, will wind up costing you in one way or another.