Can You Get a Loan With No Clear Financial Records?

 Whose Today’s Guest?

Hezron Musonda is a remarkably hands-on and analytical financial and operational executive functioning within fourth largest bank in Zambia.

Financial Record Required By the Bank

Many people only get to know of financial records at the point of seeking finances. The financial records that an institution will request for will depend on the kind of facility that the business is seeking. These could range from financial statements and depending on the size of the business they may be required to be audited financial statements.

Other records that would be required are things like cash-flow forecasts which may require some sensitivity analysis to be done. The forecasting will show the best case scenario as well as the worst so that a bank can have a better appreciation of your prospects

Relevance of Financial Reports

Financial records are very important as they help a bank in making the decision of granting a loan or not. The banks main interest in granting that loan will be based on the recoverability of the facility should it be granted. The bank will look at your business prospects and try to determine if you will be able to repay. Most people have the perception that having collateral is a guarantee of getting a loan.

This is not a fact as a Bank is not meant for debt recover but rather to provide financing with the expectation that those that borrow will be able to repay according to the agreement. For any bank the last thing they want to consider is your collateral. Business owners should be able to prove that they can repay their loans by providing all the financial records need.

In accounting there is a common saying, “what is not documented is not done.” So if a business cannot provide financial records then how then can a third party be able to believe that you will be able to repay a loan.

Misconceptions on collateral

When it comes to collateral that is the last thing that banks consider because sometimes it tends to be expensive and in some cases may even end up leading to financial legal suites.

Lack of Capacity to Repay Back Loans

Many SMEs do not have the proper financial records and that is why  most do not  get their loan requests approved, but I should state that there is a way to get a loan with no clear financial records. This is considered as a special case:

• Cash flow/ Transaction Specific  Short Term Loans

This can only be granted there is already an order placed and the SME is asking the bank to give them a loan to be able to meet the order and the money has been recouped it will be paid back. This sort of transaction will require little to know business records and the bank will need to ensure that they can ring fence the receivables that will come out of the transaction.

It is not cast in stone that you will always need to produce financial record to get loan, banks also try to tailor their packages to meet the needs of their client.

Getting Past the Lack of Financial Statements

It is time that small businesses begin to invest in ways that they can prove to financial institutions that they are capable of paying back their loans. It is only ton that basis that a bank will be able to grant a long term loan to a small business.

Each bank has credit policies and they need to adhere to them. Some of the targeted financing will come from investment banks like the EIB and will provide financing through the local banks for SMEs but likewise it will have preset conditions will have to be met.

Business owners should also seek to get basic financial training on some financial issue that affects them. They shouldn’t only be interested in how to run a business but in the implications of the financial decisions that they make. It is out of these decisions that they will be able to prove to their capability to repay.

Using Personal Loans to Finance a Business

It is hard to give a straight forward answer to this, but it could fall on either side, it could be a “yes” because you are eligible to get that facility and you have a regular source of income like a salary that you can use to repay.

There will also be a need to have a clear business strategy and a clear comprehension of the business risks involved as well as the internal and external mitigants that will be implemented to assuage the risk. The motive and intent for pursuing this avenue should be very clear from the start.

“No” in the sense that, it may compromise the separateness of the business from personal finances. This is where most business owners begin to entangle there personal and business finances. Because they have provided financing through a personal avenue they will begin to feel entitled and over incentive themselves by constantly dipping in to business finances.

Key Insights:

• Understand the type of facility that you need in order to get a short term loan with no financial records
• You need to be able to demonstrate your ability to pay back a long term loan by providing the required documentation.
• Acquire financial knowledge and start understanding all the financial aspects in your business.
• Collateral is the last thing that banks look at when one requests for a loan.

“What is not documented is not done, hence the need for financial records”