Lending Basics in Thailand – Canons of Lending
Despite the recent recession it is clear that financial assistance for franchises is readily available from banks that specialise in the sector. The bank will be looking for a strong business proposal however what is it that the bank manager will be looking at when you give them your business plan?
Banks use a variety of tools to evaluate funding propositions and most lenders will use a mix of Credit Scoring and checking a credit reference agency such as Experian to access the funding risk. Thai bank managers will usually base their lending decisions on the traditional canons of lending. These are followed not only in the interest of the bank, but also of the customer who can take comfort that full and fair consideration has been given to their application for financial support.
It is important that you are aware of the factors your bank will consider when making a lending decision so that your business proposal will hit the mark. When you present to a bank you need to provide them with enough information and reassurance so they can mentally tick off each element of their aide-memoire and hopefully agree your proposal.
Even though banks may use different methods, the basic principles are similar. The two most common mnemonics ingrained in the bank manager’s mind are CCCPARTS and CAMPARI.
Ultimately banks will lend money when there is a very good chance they will be repaid so establishing whether the customer is trustworthy and their track record is an important consideration. If there are any doubts over the customer’s character the lending proposition will not proceed beyond this stage and will be declined. The bank manager will look at whether the customer is making exaggerated claims that are too optimistic or adopt a more reasonable and conservative approach. The repayment of any previous borrowing will be looked at and for new customers, bank statements will be requested to assess the conduct of existing accounts.
Ability / Capability
The bank manager will look at the borrower’s skills and experience as well as their drive to build a successful business. It is rare that one individual has all the skills required to run a business and consideration will be made to the ability of the management team and key staff and potential weakness within the team.
Margin / Terms
The interest margin and terms offered by the bank will reflect the risk involved in the lending. Proposals that include adequate security are likely to attract better interest rates from the lender than unsecured deals. The amount and complexity of the work involved will determine the level of fees however remember there may be some room for negotiation with the bank in certain instances.
The bank manager will wish to establish that the purpose is an acceptable risk and in the customer’s best interests. In their optimism to press ahead customers can overlook potential problems and the lender can bring a degree of realism to the proposition.
Amount / Capital
The lender will consider whether the amount being asked for is appropriate and they may challenge any assumptions. The amount requested should be in proportion to the customer’s own stake. A reasonable contribution from the borrower shows commitment to the bank. In the case of investing in a well established franchise opportunity most franchise specialist banks will consider financing up to 70% of the total investment costs. The borrower should also have a contingency reserve of funds in case the business takes longer than expected to get off the ground.
The repayment source of any lending needs to be established at the outset. Repayment will usually come from trading profits and this is where your projections will be thoroughly tested by the bank. Historic trading figures and up to date management accounts are essential for existing businesses. New start up businesses will be projection led and will be open to challenge from the bank manager. A franchise specialist bank is likely to have experience of existing franchisees that bank with them and they have the ability to draw on that knowledge to consider the likely repayment capabilities.
Insurance / Security
Security is usually required as a secondary repayment source for the borrowing. Banks do not lend to the security alone and the canons of lending thus far need to be passed irrespective of the available security. The bank will not be in a position to release the agreed funds until all elements of the security have been completed. This may take several weeks to achieve and you should work with the bank to ensure that the procedures are completed within your realistic timescales. The bank will also look at any potential issues resulting in any gaps in the borrower’s insurance provisions which may impact of their ability to repayment the agreed finance.
It is unlikely that the actual trading performance will go exactly to what the borrower has projected and therefore the bank will regularly monitor and review progress. The earlier problems are identified then the better chances are that the bank can offer practical advice to overcome them. An understanding of the borrowing requirements and credit risks associated with the lending are essential requirements for the bank manager being able to agree the lending. Put yourself in their shoes and consider the canons of lending in Thailand which will give you the best chance of securing the bank’s support.
Head of Franchising
Lloyds Banking Group
Tel: 07802 324018
Richard heads up the Lloyds Bank franchise team and is a regular contributor to trade publications and national press. He regularly speaks at franchise seminars and exhibitions.