Loan Officer Training: How to Loan Officer Training: How to Assess a Client BusinessAssess a Client Business

This training instructs KMF loan officers in how to assess client businesses prior to loan disbursement. Loan officers are

required to visit the client’s business location and visit the guarantor. During the visit, the loan officer completes four forms: balance sheet, income statement, cash flow analysis, and cross-check analysis (verification of the viability of the

business from sources other than the business owner). These measures ensure that KMF makes quality disbursement

decisions and minimizes the risk of client over-indebtedness.

AlmatyAlmaty, 2010, 2010Real support – to real business!

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Evaluate the Following Criteria Evaluate the Following Criteria During the Client Business During the Client Business AssessmentAssessment

• Business location Business location / / sales outletssales outlets• Business type and its turnoverBusiness type and its turnover/ / type of goods or servicestype of goods or services• LegalityLegality//legal statuslegal status• DemandDemand//seasonalityseasonality• Range of goodsRange of goods//business volumebusiness volume• SuppliersSuppliers• Business costsBusiness costs• Credit historyCredit history//debtsdebts• MarkupMarkup• Additional income sourcesAdditional income sources• CompetitivenessCompetitiveness• Owner’s health statusOwner’s health status• General economic position of the businessGeneral economic position of the business

Components of the Business Components of the Business Assessment: The “Five C’s”Assessment: The “Five C’s”

• CharacterCharacter

• CapacityCapacity

• CapitalCapital

• CollateralCollateral

• ConditionsConditions

““C #1”C #1” - - CharacterCharacter

Assess the personal reputation of the business ownerAssess the personal reputation of the business owner::

• Reputation and place in communityReputation and place in community• Residence legalityResidence legality• Type of dwelling Type of dwelling ((property, qualityproperty, quality))• Family general incomeFamily general income• Family general expensesFamily general expenses• Support for a loan and business by family membersSupport for a loan and business by family members• Psychological and emotional stabilityPsychological and emotional stability• Entrepreneur’s experience in businessEntrepreneur’s experience in business• Credit historyCredit history ( (money-lenders, family, suppliers, relief money-lenders, family, suppliers, relief

fundfund))

““C #2”C #2” - - CapacityCapacity

Assess the viability of the businessAssess the viability of the business::

• Business ageBusiness age• Main places to make purchases and regular suppliersMain places to make purchases and regular suppliers• Volume of salesVolume of sales• Main sales locationsMain sales locations• Number and status of workersNumber and status of workers• Procedure to make products or provide servicesProcedure to make products or provide services• Equipment necessary for each type of activityEquipment necessary for each type of activity• Average gross income or profit sizeAverage gross income or profit size• Repayment capacityRepayment capacity

““C #3”C #3” - - CapitalCapitalAssess the liquid financial resources of the business:Assess the liquid financial resources of the business:

• Client financial resourcesClient financial resources::– EquityEquity– Borrowed fundsBorrowed funds

• Percentage of sales on creditPercentage of sales on credit• Turnover by days Turnover by days ((cycle of business activitycycle of business activity))• Volume of salesVolume of sales• Frequency of product realizationFrequency of product realization• Accounts of how business is runAccounts of how business is run

““C #4” C #4” - - CollateralCollateral

Assess the assets and guarantees available to pay loan:Assess the assets and guarantees available to pay loan:• Title to assetsTitle to assets• State and property reliabilityState and property reliability• Legal right to sell propertyLegal right to sell property• Realistic cost of propertyRealistic cost of property• Possibility to realize products on local marketPossibility to realize products on local market• Psychological importance of a guarantee Psychological importance of a guarantee • Guarantor’s ability to repay indebtednessGuarantor’s ability to repay indebtedness• Borrower’s and guarantor’s motivation/willingness to Borrower’s and guarantor’s motivation/willingness to

repay indebtednessrepay indebtedness

““C #5”C #5”- - ConditionsConditions

Conditions affecting business but being beyond businessman Conditions affecting business but being beyond businessman controlcontrol. .

For example, business seasonality, competitiveness, inflation, For example, business seasonality, competitiveness, inflation, access to suppliers, access to suppliers,

abnormal climatic conditionsabnormal climatic conditions ( (non-characteristic for this region non-characteristic for this region severe frosts or severe frosts or

strong heatstrong heat), ), business or marketplace construction/ destruction.business or marketplace construction/ destruction.

In order to assess the above conditions, you must:In order to assess the above conditions, you must:• Fully understand the local economyFully understand the local economy• Understand government regulation affecting small businessesUnderstand government regulation affecting small businesses• Full understanding of how seasonality affects businessFull understanding of how seasonality affects business• Evaluate competitive advantages of client’s businessEvaluate competitive advantages of client’s business• See the conditions under which goods are storedSee the conditions under which goods are stored• Take into account the loan conditions that apply to specific Take into account the loan conditions that apply to specific

businessbusiness::– AmountAmount;;– MaturityMaturity;;– SeasonalitySeasonality;;– OtherOther;;

Potential Problems to Avoid Potential Problems to Avoid During the Business AssessmentDuring the Business Assessment

• CheatingCheating: : false business etcfalse business etc..• FraudFraud• IntermediariesIntermediaries ( (“clients” who take credit for another “clients” who take credit for another

person). person). • Inaccurate or incomplete information obtained from a clientInaccurate or incomplete information obtained from a client• Discrepancies between what Loan Officer “sees” in the Discrepancies between what Loan Officer “sees” in the

market during the visit and reported financial datamarket during the visit and reported financial data• Not taking into account business-cycle and business Not taking into account business-cycle and business

seasonalityseasonality• Untimely salary disbursement in budget organizationsUntimely salary disbursement in budget organizations• Inaccurate understanding of family involvement in business Inaccurate understanding of family involvement in business

((i.e. when a business spends a lot from family incomei.e. when a business spends a lot from family income))• Inaccurate assessment of how loan will affect future Inaccurate assessment of how loan will affect future

business growthbusiness growth• Insufficient time and attention is attached to how a client Insufficient time and attention is attached to how a client

will use loan will use loan ((e.g., to buy goods, change pricese.g., to buy goods, change prices; ; wholesale wholesale purchasespurchases; ; expansion through entering new markets—expansion through entering new markets—opening additional outlets etcopening additional outlets etc.).)