Break the bank: convincing them to approve your loan

As part of a Drupa finance series, this feature (with inputs by Sanjay Agrawal, senior president and business head - business banking - Yes Bank) examines whether banks are lending to printers, and how to make the process less cumbersome.

04 May 2012 | By PrintWeek India

You’ve got to spend money to make money – or so the saying goes. And it certainly rings true in the print industry. If you don’t put your money where the advancing technology is, you can expect to see your profits plummet. With cost pressures mounting, small and medium companies in India are facing strong growth headwinds. In this light, many print companies are expecting the government to provide some relief to the SME printing firms.

The good news is that the big names in banking claim that, despite the current climate, they’re as keen as ever to offer business loans. Most of the top management in top banks claim they are approving 80% of applications – and nationalised banks say it is sanctioning 17 out of 20. The problem of lack of investment may not be down to a lack of funds then, according to Sanjay Agarwal, Yes Bank, senior president and business head.

“Its not so much access to money that’s the problem, but high interest costs, resistance to offer sufficient collaterals and the economic climate that is making businesses reluctant to invest “

Agarwal adds, “These days, proving you can pay is not just about some clever accounting either ... Banks strongly rely on market checks, references to CIBIL report, feedback from other players in industry.”

For instance firms that have delayed or defaulted in payment to a supplier may actually have a loan rejected. There are instance where professional and honest conduct with your peers, may help secure a loan without much hassles, since references are good. “So, please be fair in all your dealings and you’ll never be disappointed by any bank is one of the guru mantra which Agrawal highlights. He adds, “We bankers have evolved from relying on paper to relying on non-written cues as well.”

Testing times
While it may be true that the banks do have money available – and that some printers may be reluctant to use it – that does not mean it is easy for those printers that do want to invest to prise open a bank’s wallet. As those print firms in the industry who’ve recently applied for loans will testify, and as the banks will concede, the process of securing a loan for capital investment has become more demanding of late. So just how hard do printers have to work to get an application passed?

“Print firms should look for innovative means of finance like buyers credit, pricing of which comes in range of six-seven percent p.a. in like 13 to 15 percent in case of rupee term loans. After hedging cost also comes less than 10 percent,” says Sanjay Agrawal of Yes.
Today banks scrutinise each deal in much more detail. “Like all banks, we ask questions now,” admits Agarwal. We spoke to few  print CEOs who mentioned that banks officials “spend a lot of time going through a business’ financial forecasts, challenging them.”

These days, proving you can pay is not just about clever accounting, either. Banks are willing to test an applicant’s confidence to put their own money where their mouth is, according to a leading packaging converter in North India.

“For our last two loans, I’ve had to provide a personal guarantee,” he explains (on the condition that we do not disclose his identity).
Even a personal guarantee might not sway the banks hand, however, with some lenders seeking even more security by looking to involve the manufacturer.

“My bank informed me that if you want a loan on a piece of high-end digital kit, then the underwriters are now looking for buy-back arrangements with manufacturers, guaranteeing that they’ll buy the equipment back at a set value if your company goes bust,” says a digital player who is rapidly expanding in Mumbai. “It’s going to be hard to get manufacturers to agree to that, so it could be increasingly difficult to get loans in those cases.”

Tips from Yes Bank
While bank loans are still a viable source of finance, what will print companies do if they become even harder to secure? Firstly, remember that a traditional loan isn’t the only option available from banks.

“Involve the bank in your plans,” says Agarwal. “We are able to advise on whether a typical bank loan is the best option, or whether it would be better to look at asset-backed lending (some banks will take on the risk of the asset rather than looking for a manufacturer buy-back agreement), or a government-backed scheme.”

Agarwal adds, “Negotiate and get delivery of machines before 30 September to claim benefit of 100 percent depreciation.” Also he suggests entities should look at forming groups and buying together, it’ll surely help clinch better deals at advantageous terms.

Another useful tip Agarwal has, is, “Before deciding on which machine to buy, it is important to decide on machine that are or would be useful to the business of your customer. For eg, you may want a four-colour machine while customers might want a machine with UV coater.”

Agarwals states, “At Drupa don’t just look for machines. Also try to scout for prospective customers so that you can export too. This helps in developing exports business and thus claim duty drawback and save custom duty.” For players in the domestic market he adds, “even if one can afford to buy through own sources, they should place their sums as an FD with banks and look at buyers credit route. Arbitrage opportunity to save at least two-three percent ie Rs two-three lakhs per one crore worth of loan.

He says, “When arranging loan in foreign currency, avoid volatile currencies or less traded currencies like Swiss francs, British pounds,  Yen, etc. Try to restrain exchange in currencies like USD, Euro.”

Finally Agarwal states, “Avoid peer pressure. Take a purchase decision that suits your style, capacity and financial strength.”
Get that forecast together, get to your bank and get set for Drupa. But before leaving for Drupa, as Agarwal advises get an in-principal sanction letter from your banker. This is very important step. Happy shopping!

Plans for success
With banks being cautious about signing off on loans, what can you do convince them that you’re a good case for investment? Try this:

Be clear
A lot of people don’t know how much money they need or what it’s for. For eg, if you’re asking for money to invest in new presses, do you need funds for increased paper supplies too? Give the bank confidence that you have thought it through.

Prepare a (sensitised) plan
Banks would want a cashflow forecast to show that the business can pay back the money. And we’d test it against accounts from a few years. If, for eg, your debtors have always paid in 60 days but your forecast relies on them paying in 30 days, a bank would question that. Next, sensitise your plan. If you’re forecasting 5% growth, show what you will do if you have a 5% drop. If you can demonstrate that you’ll still be able to afford the loan, that will give the bank comfort. When sensitising, think about everything that could have an impact – your competition, your location, even positives such as your business suddenly doubling in size. For banks, the numbers is the most important thing – but a slick PowerPoint presentation and organised documents create a good impression.

Keep it concise
Sometimes you can read pages of a business plan and still not be sure what the business does or wants, so be clear and concise. If you can get everything on five pages that’s enough. Or have a two-page summary with 20 pages to back it up. If the bank is interested, they will ask for more.

Use your head  
Don’t base your plan around manufacturer claims. They may say a machine will do 250 square metres per hour, but that won’t produce a quality that’s marketable. The thumb rule is to divide numbers by two, or test the machines and make your assessment. It will be important to the bank that you have not relied on the manufacturers’ promise.

Sell your sector
You can’t expect bankers to know everything about the type and pedigree of equipment you want to invest in. The reality is that banks are not that interested in lending on certain types of equipment and in my experience that includes digital printing kit. They need to have a better understanding of the industry. While there may have been high depreciation on equipment in the early days (which left banks lumbered with worthless equipment when companies defaulted on loans) that has levelled off. So make them aware of that. Some banks are concerned that there are too many companies in the printing sector and not enough work. So address that in your plan – why will your firm continue to prosper?

Consider seeking advice
A broker or financial advisor can help with everything from getting your business plan together to presenting it to different investors. But bankers do not entertain proposals if received from brokers and agents. Even RBI does not permit solicitation of business from brokers and sub-brokers. If a company’s numbers are true, every bank will lend at appropriate levels which are required for given activity levels. Entities approach brokers only when they want more monies from bank and then the trap starts... Brokers up numbers , make fictituous entries and get loans sanctioned, which is not a healthy practise.Remember, it’s you the bank wants to be convinced by – not your intermediary. Another place to go for information is
Think outside the box
Asked your bank for a loan and been rejected? Don’t panic. Your incumbent bank isn’t always the best place, as they don’t want too many eggs in one basket. They might not lend to you because you’ve got pre-existing loans, whereas another financial institution will.