In accounts receivables financing, the evaluation takes account of the financial condition of your borrower, i.e., the entity that owes you money. The analysis of repayment capacity focuses not on cash flow from operations but on cash flow from receivables and inventory. Whereas typical loan borrowers have their balance sheets and financial statements analyzed, for A/R and inventory financing, the relevant analysis is on the quality and value of the receivables or inventory. The bank will also assess its ability to control and monitor the pledged assets, e.g., how trustworthy is the warehouse management that is taking care of the inventories, as well as its capacity to dispose of the assets in distressed situations.
Negotiation
To be competitive in business, one must minimize costs. To the extent that you need to borrow, you should try to get the best terms possible. If the financial charges and related costs of borrowing are not advantageous and risk putting you into a situation where you are no longer competitive, it would be better not to borrow. The goal of negotiation is to obtain a favourable price (cost of the loan), including non-interest costs, fees and charges (see Box 5.3). Furthermore, you should negotiate for terms that are most convenient for you. Avoid, for instance, tying up fixed assets for a small short-term loan if you know you will need them as security for a medium- to long-term loan in a few months.
Box 5.3 Checklist of commissions, fees and charges Loans
Appraisal fee (or front-end fee). This fee is a percentage of total loan facility, paid up front, often as a deduction from principal disbursed. Amounts vary from one institution to another.
Commitment fee. This is a fee paid on undisbursed portion of a loan facility. It is often waived. The rate is usually between ½% and 1%.
Interest on outstanding principal, expressed as a per annum rate. Rate may reflect lender’s assessment of risk. Low rates may be available through incentive schemes for exporters or for development components considered of special economic benefit to the country. (The method of calculation varies from one institution to another. You should make sure this method is thoroughly explained to you. For instance, interest may be calculated on day-to-day balances, or on monthly overdraft ceilings, on a 360-day year, and so on.)
Legal costs and charges.
Disbursement fees. Amounts charged by the lender as a fl at fee on each disbursement if there is more than one.
Trade finance
Charges for payment facilities, services. Fees and commissions charged for opening and confirming L/Cs, collection and other sundry services rendered by banks.
Discount rates, forfaiting rates. The percentage charged by the discounter or the forfaiter for discounting or forfaiting receivables.
In loan negotiations, lenders aim to get a good rate of interest on their money at little risk. They will try to obtain the best collateral possible. They will probably prefer the types of facilities and payment methods with which their staffs are most familiar, and which do not require too much back-office effort or time. As their time is precious, lenders will try to obtain fees for services rendered.
Negotiations should benefit both parties and each should feel satisfied with the outcome. The relationship may develop into a long-term one, with the bank growing to appreciate and trust you as transactions develop and your business expands. Bankers are keen to keep good customers. Banks work in a competitive environment and will vie with one another to obtain business. If your bank is pleased with the way your transactions are conducted and there is a feeling of mutual satisfaction and loyalty, your negotiating position will be strengthened and concessions will be eventually granted in your favour. At the start of the relationship, however, do not be surprised to be offered less favourable terms than the bank’s more tested borrowers.
Below are a few tips to help you prepare for negotiation with the bank. 1. Prepare before the negotiation. Unless you have previously dealt with
the bank, learn all you can about the institution: its business philosophy, affiliations, shareholders and directors, lending rates, schedules of charges and fees for services. Brochures and annual reports, normally freely available, provide information about structure, organization and services. Colleagues and other business people who have previously done business with the bank can also provide useful information.
2. Come well prepared for your presentation. Make sure that you submit all the relevant documents (see Box 5.2 above). State clearly what you intend to do with the funds you want to borrow. If your intention is to finance the purchase of goods or services for manufacturing products or the purchase of commodities for export, tell your banker the whole story: from whom you are buying, to whom you are selling, how you intend to pay and get paid. Speak to your bank about these matters before you sign contracts or agreements with your suppliers and customers or make payment arrangements.
3. Seek advice. The negotiation can be a good opportunity to explore options. You may have in mind one payment method, but an experienced banker can advise you of alternatives. He can advise you of the risks and dangers of various payment methods, on the most suitable ways to finance your transactions and on the security you should provide as a guarantee. You should remember to ask about hedging possibilities to cover or reduce risks of currency and price fluctuations.
4. Be cautious. In considering the bank’s advice, resist borrowing more than you need, or for too long, or at too high an interest rate. Banks sometimes propose the types of credits or payment methods with which they are most familiar, or that are the most remunerative or least risky for them. Before you seriously pursue a financing application at one bank, get information on the alternatives. Ask about costs. Remember there are costs, fees and charges in addition to the interest rate. What about front-end fees? (These are payments deducted from the loan at disbursement to cover the lender’s cost of evaluating your request, assessing the risk or opening the loan account.) What are the back-office fees? Ask about the bank’s standard or sliding scale of rates for its services and how these rates will affect your transaction. Include in your consideration the legal fees for drafting a loan agreement, which may be part of your cost.
5. Show loyalty and professionalism.Avoid giving the impression that you are talking to other financial institutions after negotiations have reached the stage where the agreement is finalized and awaiting management or board approval. There is nothing wrong in trying to get to know various alternative sources and wanting the best deal, but this should be done at an earlier phase of the process. If you tell bank managers that you have found a better deal elsewhere after they have spent hours with you, drawn up documentation and obtained clearance from their loans committee, senior management or board, they will feel that you have wasted their time. There are many ways of arranging a trade finance package. Always inquire into the cost of the facility offered and compare it to the cost of the alternatives. If you are able to show the bank that it would be cheaper for you to obtain the same result using another method, point this out tactfully but firmly. But
know your facts. If, for instance, the bank’s interest rate is higher than the rate your supplier is prepared to accept for trade credit, tell the bank of this alternative and be prepared to show a letter from your supplier to that effect. As with loans, you need to understand the other fees and charges that can increase your cost.
Reputation and mutual trust are the keys to a good borrower-lender relationship. You should project confidence in yourself and your business during negotiations with the financial institution. Try to gain the confidence of your bank with the view towards a long-term business relationship. Low cost is important, but the cheapest lender may not also prove to be the best in the long run.