A company asks for a loan: The general criteria by which banks are considering granting credit to an SME.

We all know that is not always easy getting a loan from a bank. It's also true that very often we are not well prepared during our very first meet with the bank or we expose our request in the worst ways, creating the best conditions for receiving a loan request denial. Beyond what may be important the financial strength of the applicant or his being positively known (this aspect can also been taking into account a lot especially the small local banks), the bank evaluates the possibility of granting credit to the company according to criteria that you should know.

First, the bank needs to understand the competitive ability of your enterprise through information on the current situation and forecasts of market development in which it operates, the products or services produced and or marketed and its competitive position in its market, taking into account the characteristics of the sector and the patterns of competition.
With your cooperation, the bank seeks to first understand the nature of the legal and ownership structure, the business sector, products or services offered, key competitors, sales channels, the phase of the cycle of life of your products or services, the experience of owners and managers.

The bank will then need to identify the nature and origin of the financial needs of your company, ie the "why" the company is asking for the loan and what propose to you.

For example your financial needs could be related to:

1. the financing of working capital (which originates from the different timing that characterizes receipts and payments: acquisition - processing - sale;
2. the financing of investments;
3. the replacement of existing loans with other more congenial to the capital structure and to the dynamics of the financial (eg, short-term loans with medium/long term, in line with the duration of the assets).

The evaluation of the bank continues with the analysis of repayment ability of the enterprise. It seeks to ascertain, first, whether there are economic and financial conditions for success, if the firm is able to repay the borrowed capital.

This analysis by the bank follows several approaches, depending on the type of business, the amount requested, the type of your enterprise's financial needs.

For example, for short-term financing needs related to current operations such advance or discount of receivables, the bank evaluates the overall financial situation as well as the capacity of producing cash flows in the short-term.
For medium or long-term loans the bank assesses the ability to repay the loan in future years, by giving precedence to the study and interpretation of not only the cash flows but also the economic flows that the company will be able to generate in future years.

The venture capital or equity capital for the bank is an important indicator of the confidence that the entrepreneur or the ownership are placing the initiative and, therefore, the measure of risk that they bear.
And the amount of venture capital directly affects the amount of debt inasmuch as increasing amounts of capital may be associated with larger amounts of debt capital, mostly made ​​up of bank loans.
It's clear that the amount of capital affects the overall balance of the assets of the company.

There is not a "right" level of invested capital defined a priori for most of the firms, because that value depends on the characteristics of both the enterprise and the specific business sector. The consequence is a different borrowing capacity and therefore a different contribution of equity by the entrepreneur or the ownership.

The bank, to mitigate its risk with each client, asks almost always guarantees. Through the provision of adequate guarantees (I'll go into deep of the concept of "adequate" in another post), a company can have access to funding even in the presence of low levels of capitalization, or with a short history of market presence, and even if following the assessments made we talked about earlier, there remain uncertainties about its creditworthiness. Ultimately, the guarantees transfer part of the banks's risk on the company or on other persons (whether shareholders or third parties), while not changing the risk profile of the funded initiative.

An important factor taken into consideration is the quality and quantity of relations between the bank and the company. The bank may know the applicant because of the relationships it has had in the past and therefore it is in possession of information about its solvency, ability and willingness to meet its commitments to the banking system. And the same goes for information about relationships between the company and the banking system as a whole.