The document discusses assessing the needs of business customers seeking financing. It provides guidance on determining when a customer genuinely needs financing and the transaction is likely to be viable. Some signs include an increase in sales/business volume, continued profitability but cash flow challenges, and financing needed to expand capacity due to sustainable increased demand. The document also discusses assessing non-financial needs, as customers may seek loans to address symptoms rather than underlying problems, such as inadequate management skills, unprofitability, lack of internal controls, or ineffective inventory/debtor management.
1. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Understanding the Business Customer
Understanding the Customer’s Business
Assessing Customer Needs
Lending in Foreign Business Transactions
Financing Property Developers and Contractors
Financing Agricultural Projects
MODULE COVERAGE
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Alternative Sources of Business Finance
2. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Assessing the business customer’s need for financing
As a rule of the thumb (but by no means exhaustive guide), the customer genuinely
needs financing and the transaction is likely to be viable if:
• The need is triggered by increases in the volume of business.
• Sales figures (monthly, weekly or annually) are increasing in a considerable way.
• The business remains profitable or gets more profitable, yet cash flow is a
challenge (because of volume growth). (NB: It is not profits that pay loans but
cash!)
• The financing need is to expand capacity, in response to sustainable increased
market demand.
• Management of the finances in the business is prudent, and personal finance of
the owners/shareholders is distinct from that of the business.
• The customer, who is successful and remains profitable, wants to diversify into a
new area.
• The size of the customer’s balance sheet and business volume justifies/relates to
the loan request.
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3. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Assessing non-financial needs of business customers
There are times when customers seek for bank advances honestly but
mistakenly. The problem could be in an area that will not be solved
by borrowing more money to put into the business. In several
businesses, mistakes or inadequacies in non-financial areas can
result into persistent cash flow challenges.
Because the customer is unwilling or unaware of the real issues,
he/she prefers to borrow money to address the symptom rather
than the problem.
Typical areas to consider in assessing the customer’s non-financial
needs which might cause financial difficulties are;
a. Customer’s life style: Is the customer financially prudent? Frugal?
Careful? Wasteful? Does he keep up to date records of his own
drawings from the business and are these replenished back?
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4. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
b. Business and financial management skills: Is the customer good at managing the
business overall? Are the right people in the right places? Are there good systems
for safety and soundness in the conduct of daily business transactions? Is the
money well managed and accounted for on a daily basis?
c. Profitability assessment: Does the customer assess and calculate/track profits
regularly? (unprofitable businesses eventually result into cash flow shortages and
if the customer is unable to detect this, they might prefer to borrow to cover the
cash flow shortfalls)
d. Internal controls and safety: Are the stocks, money, business assets, procurement
processes, cash receipts and other transactions completely safe from possible
pilferage?
e. Management of inventory and debtors: Are the stocks of raw materials, finished
goods, merchandize and other things at suitable levels/ (overstocking means to
much money is always tied up in inventory). Is the customer managing the debts/
accounts payable effectively? Giving lots of time to debtors while borrowing to
finance working capital can be very costly, eventually reducing margins and cash
flows.
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Hinweis der Redaktion
At the end of this unit, the students should be able to:
Determine the cause and suitability of the business customer’s need for financing.
Relate the customer’s business size to financing needs.
Explain how to assess non-financial needs of business customers.
It can sometimes be difficult to tell whether the customer really needs financing, and to what extent. In some cases customers mismanage the business, it becomes illiquid and then they come to the bank for a loan to revamp the financial position of the business. This mismanagement-triggered need is not good ground for the bank to lend. The customer could just do the same thing – mismanage and later come back or go somewhere else for another loan.
(Note however that much as diversification mitigates risk, some businesses may collapse as a result. A customer who focuses and remains efficient in a business may perform better. If you chase two rabbits, you catch none!)