EU-REPARIS is funded by the European Union and is a part of WB EDIF. DO YOU NEED A LOAN? HELPING SMES ACCESS CREDIT IN SERBIA While each bank has different approaches and These insights are meant to help SMEs understand procedures when it comes to issuing loans, there are how banks make lending decisions, so you can some practices that are common to the vast majority better prepare yourselves for the loan application of banks. The World Bank conducted a survey of process and increase your chances of a getting a commercial banks in Serbia to better understand loan (and at better terms). Keep in mind that small such practices and found that banks place a very loans with shorter repayment time (called maturity), high importance on the quality of the financial such as overdrafts, are not likely to require so much information that is provided by companies seeking information and preparation. But particularly if a loan. Incomplete or low quality information results you want a larger loan, for a longer maturity, these in delays, higher costs (meaning higher interest rates insights could be relevant to you. and/or fees), or outright rejection. 8 INSIGHTS TO HELP SMES UNDERSTAND HOW BANKS MAKE LENDING DECISIONS 1 The number one priority for a bank is making sure the loan (and related interest) is repaid. Banks want to make sure you can repay your to repay the loan and corresponding interest. It loan. One important way banks assess whether is therefore important to manage finances well. a company is able to repay a loan is through If a company waits until they are short on cash analyzing its financial information. Banks will to request a loan, it is highly unlikely that a bank analyze whether your company will generate will approve it. enough profit, over the time period of the loan, 2 Collateral is not enough. Collateral is important, since it represents a form bank if it can be sold. For this reason, things that of insurance for a bank, in case the loan is not are hard to sell (no matter how valuable) will not paid back. But it’s not enough. What is collateral? usually be considered as collateral. Examples It is an asset that the bank can seize if the loan is of this would be custom-made machinery or not repaid, in order to sell it to recover all or part property that doesn’t have clear rights attached of the loan. So, collateral is only valuable to a to it. 3 Banks prefer to lend to established businesses, with a positive credit history. Startups and new ventures are not typically financed by banks. If a company has been operating for less than finance new line of business, banks are unlikely two years, and does not have at least two years to approve a loan. A new company or a new of annual financial statements to demonstrate line of business make it difficult for a bank to be formal operations, banks are unlikely to issue confident of the company’s future profitability a loan. Similarly, if an existing company with (and ability to repay the loan). several years of operations is seeking a loan to 4 Reputation matters. The first things banks will do is try to get information history of past bankruptcies or other negative about your company and you (as owner), before information. They will also check to see if you considering other parts of your loan application. have or had in the past any accounts blocked If you or your company is perceived to have a by the National Bank of Serbia. Finally, they will “bad reputation”, the rest of your loan application check your credit rating from the Credit Bureau will most likely not even be considered. Banks will of the Serbian Association of Banks. Your credit check if there is any negative publicly available rating takes into consideration your repayment information about your company’s financial history for past loans, and other information that history, as well as the personal financial history is provided by banks that you did business with of the owners of the company. This includes a in the past. 5 Banks cannot rely on “unofficial” information. It is risky for a bank to take into account what tax purposes, it will be very difficult to convince is not on in your official books. As mentioned a bank that it is more profitable than it looks in insight #1, banks want to know a company “officially”. If a company is interested in obtaining has the necessary profitability to repay its loan. bank finance, it needs to be more transparent If a company operates in the gray economy, or about its profitability. minimizes profit in its financial statements for 6 Banks need up-to-date financial information they can readily understand and process. Your annual financial statements show your send them to the bank. They won’t make any company’s financial situation as of December 31 sense. Prepare an updated balance sheet and of last year. If your annual financial statements are income statement (or ask your accountant to do more than three months old, banks will want to this for you) that will give the bank a more recent see updated information, called interim financial picture of your company’s financial situation, in a statements, in addition to your annual financials. way they can easily understand them. Don’t just print out your accounting records and 7 Other companies you own (and your close family members) are taken into consideration when processing a loan application. Do you own more than one company, or do ask you about. Some banks will use software to members of your immediate family members match owners and their relatives to get a better (spouse, children) also own businesses? If yes, understanding of the business and the overall prepare a list of your “family of companies”. This family of companies. is information the bank will want to know and will 8 Qualitative information is important. Banks will analyze qualitative aspects of a which is especially important if the owner/ company, including the competencies and manager is close to retirement), the quality of experience of SME owners and managers, the their business plan, and the competitiveness of owners’ approach to corporate governance, the business (products, demand, and market the way they run the business, and succession structure). Providing information on these planning (that is, the way a company could aspects up front in a clear and concise manner continue working without the current owner, will strengthen your loan application.