5 tips for startups and SMEs to establish borrow relationship with banks

I work as a corporate banker in Hong Kong for over 5 years now and I have witnessed many SMEs failing to borrow money from banks. It’s not because they got a bad business or poor future. It’s because they missed those little things that bankers put value on.

-Be consistent - your story and the actual figures
When it comes to explaining your business to the banks, you should pay close attention to your company’s financial figures which should match what you said to the bankers. Let’s take trade debtor days (i.e. how quick a company can collect payments from its buyers) to illustrate:

If you tell the bank that your company’s average trade debtor days is around 30 days, it should really match your financial report. Although it cannot be found directly in the financial report, your banker can estimate the ratio by simply dividing your trade debtors amount by sales times number of days in your financial year. So if your banker get a figure of 120 days (which is far from the figure provided by you), he may not even bother to proceed your loan application.

-Current ratio (CR) and quick ratio (QR)
Take a look at your financial statements and get your ratios by dividing your current assets by current liabilities (CR) and by dividing (current assets - inventory) by current liabilities (QR). A low CR/ QR put your company in a rather illiquid position and hence a lower possibility of getting a bank loan. A level of CR/ QR between 1 and 1.5 are considered safe generally. And bankers value your liquidity.

-Sanctions countries
There are several sanctions list in the world imposed by the UN, the US and the EU. Make sure you keep the business proportion with parties in these sanctioned countries as small as possible. Internal procedures may prevent bankers to lend a loan to businesses with sanctions countries associated.

-Intra-group loans
Clear all unnecessary intra-group loans. These loans make your financials “messy”.

-Operating banks
Don’t diverse your daily cash flow and business transactions into too many different banks. Focus on 2-3 banks are enough. In this way, your banks are able to validate the genuineness of your business. You are more likely to obtain a loan from a bank which is your main operating bank and a bank which is not.

Usually banks look for new businesses and are eager to boost their loan size for profit under manageable risk, but bankers usually adopt a very standard guideline when granting a loan to SMEs. So don’t give them a reason to reject your application and be aware of the tips mentioned in this article.