How to win financing from a bank without any hurdles – 4

It is imperative for customers to ensure that their businesses are formal and they adhere to all the legal requirements pertaining to the business they are involved in. These include having valid business licences and other legal requirements, depending on the nature of their business. For those in, for example, hotel, fuel or medical businesses, there will be additional legal requirements that must be fulfilled.

Tax returns are also important and EFD machines and their previous reports should be available because they are important tools which help bankers have proper information about the business. Tax clearance must be granted before financing is issued.

I had pointed out earlier about transparency with regard to the type of collateral made available to the bank. Collateral is a requirement for securing financing from a bank, but is the last thing to be looked at after the other factors I have discussed.

Banks require collateral as a last resort when customers fail to meet their obligations. Bankers are usually averse to selling customers’ assets because it reflects failure on their part.

During my more than 13 years in top positions in the banking industry, I witnessed only between two and five percent of all facilities granted by banks ending up in the auctioning of collaterals. In most cases, the selling of assets was not simple as they were sold when facilities had already been written off.

Collaterals are also required by regulators as a way of ensuring that depositors’ and shareholders’ funds are safeguarded. Banks, as per existing regulations, typically extend facilities that are less than the value of collateral in order to further safeguard the interests of the providers of the cash.

To be on the safe side, it is advisable for customers to be prepared to receive 50 percent of the value of their collateral as financing from banks. The values of these assets are determined by recognised and professional appraisers and must be approved by the chief government valuer.

This is done because it takes time to sell these collaterals and, in some cases, values keep changing. Customers’ interests are safeguarded by the government and if the value realised after selling collaterals is more than that of customers’ obligations, the extra amount is paid to customers.

Collaterals can be in the form of landed property, which has been formalised and has titles. This is usually the case for large amounts. In some cases, for relatively small amounts to the tune of, say, Sh10 million to Sh20 million, other types of documents such as sales agreements by local government are accepted by banks.

Some banks also accept titles guaranteed by third parties, but others insist that in the case of third parties, there should be blood relations or spousal relationship. In the case of companies, collaterals provided by shareholders or company directors are accepted and some banks also accept third party collaterals.

Other forms of collaterals that are accepted by banks include cash guarantees. When a customer has a cash deposit with a bank, it can be used as collateral. Stocks of merchandise are sometimes accepted by banks as collateral.

There are also credit guarantees schemes which banks enter into with other reputable institutions and customers can access them by paying a small fee. Normally, these schemes do not cover 100 percent of financing facility and are complemented with other types of collaterals provided by customers.

Credit insurance schemes form another type of collateral. This involves customers entering into agreements with insurance companies and paying premiums. In most cases, guarantees from insurance companies do not cover 100 percent of financing facilities and there will be a need for customers to have other types of security.

In next week’s fifth and final instalment of this series, I will outline what customers should avoid when seeking financing from banks and provide concluding remarks.

Dr Muhsin Salim Masoud is a seasoned banker and academic, who has also served as managing director of the People’s Bank of Zanzibar and Amana Bank. [email protected]