Case study 3 - Resubmission of application

Some banks has a policy that says an application which has been rejected within certain time frame is not allowed to re-submit its new application again.

My client recently submitted its fresh application to a bank which has rejected his application about 6 months ago for some non-compliance issues. Thinking that the company had rectified all those non-compliance issues and re-submit its application, the borrower was told that the bank is unable to accept its fresh application for its previous unsuccessful record.

My advice, do not submit your full documents to a bank for official application. Discuss with the bank officer if you have any special requests which may trigger any of the non-compliance issues. For eg. one of the director not able to stand as a guarantor or you want a very high proportion of overdraft facility. Remember, these requests are not to banks' favour.

If you put in an official application with these special requests, very likely your application will be rejected and leave a record in the bank system that your application has been "REJECTED".

Change of Government policy

On 29 Oct, major local newspapers have front paged the Government announcement on the overhaul of NAP (National Automotive Policy). Among the key measures to be implemented include prohibition of import of used auto parts from June 2011.

What is the implication of this message from the perspective of bank facility?

Everybody knows importers of cars used parts, especially from Japan, have been making good profit from the trade for years. If you are one of these importers and have been relying on bank facilities to facilitate your imports, don't you think your bankers is already trying to structure an exit plan so that your loan can be fully settled by June 2011 which is less than 2 years from now.

If you are now in the business, at least there are 2 things you need to look into :

1. Voluntarily restructure your bank facility now by converting partial trade line into term loan so that your outstanding amount is paid down by then. Do not wait until the banks come to you and recall your facilities without yourself preparing for it.
2. Tighten your credit policy if you are giving credit term to your dealers. This will helps you generate sufficient cashflow to meet the above term loan repayment and to prevent huge bad debt when other banks recall the bank facility of your dealers later.

This message is also useful for other trades which are sensitive to change of Government's policies from time to time.

If bank offer me a business loan, should I take it ?

Sometimes bank will approach SME business and offer a small loan for their business when they do not need this money, the business owner will start asking whether they should take it.

Here's are my advice.

Take it :

1. If this loan can helps you to generate additional business. Make sure the profit is sufficient to cover the interest and other associated costs (legal fee, and stamp duty, CGC guarantee fee).
2. If the interest rate of this loan is lower than any of your existing facility so that you can have some savings from using less of your existing facility.
3. If you foresee that you may need the money in near future to finance your increasing sales or anticipated new contracts.

Do not take it :

1. If you do not know what to do with the money for time being and do not foresee any new business or contracts coming. Normally there is a fixed cost associated with this loan, eg. legal fee and stamp duty, and CGC guarantee fee. I do have clients who took up bank facility but did not in any way increase its turnover and the these costs eat into his profit.
2. If you intend to use the money for a new business which is not related to your existing business or do not complement your existing business.
3. If you intend to keep the money for personal use.

Some business owners regretted for not accepting the loan when their subsequent application was rejected by banks especially when the business environment gets tougher. In fact, they should be happy that the loan was not taken up since it is more difficult to make money now to repay the loan.

What is the definition of SME/SMI ?

SME/SMI can be categorized into 3 goups based on EITHER no. of emplyees (depending on industry) or yearly turnover as summarized below :

Primary agriculture Manufacturing Services

Micro

Small 5 - 19 5 - 50 5 - 19

Medium 20 - 50 51 - 150 20 - 50

Case study 2 - Sudden increase in turnover

Lets examine the following reported turnover of my client :

F/Y 2008 - RM 13 mil.
F/Y 2007 - RM 10 mil.
F/Y 2006 - RM 9 mil.

In my experience, it shouldn't be too much of problem if this client wants to apply for additional facility based on the F/Y 2008 increased turnover.

However, after examining the last 12 months bank statements, I noticed that the average monthly deposit is only RM800k+, meaning the turnover for F/Y 2009 is anticipated to come down to its previous years' average of RM10 mil. On further questioning on the F/Y 2008 result, the client admitted that there was 2 ad-hoc transactions during the financial year which had pushed up the turnover and such transactions are not foreseen to be recurring in future, meaning these were just one-time transactions.

In this scenario, bank will only evaluate the working capital requirement of the company base on the projected turnover of F/Y 2009 and not F/Y 2008.