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5 important things SMEs should understand to apply for guaranteed loans!

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Credit guarantee aims to support businesses, especially SMEs, access to formal loans. Under CGCC’s current schemes, CGCC provides credit guarantees on loans disbursed by banks and microfinance institutions that are the participating financial institutions (PFIs) to the borrowers. To reap the benefits of credit guarantees, the borrowers must be ready to apply for loans from the PFIs in the first place. Understanding how the PFIs assess the borrower’s creditworthiness helps the borrower better prepare to get the guaranteed loans.

 

Conditions

5 important things SMEs should understand to apply for guaranteed loans!
5 important things SMEs should understand to apply for guaranteed loans!

Before approving a loan, the bank must be convinced about the loan purpose and the appropriate loan amount for such purpose. How can the borrowers convince the bank? A reliable business plan and financial statement are good testimony to justify the loan purpose and amount. A proper business plan and financial records not only make it easier to borrow but also allow borrowers to critically examine the current business condition and plan better for success. Precisely, they help gauge the appropriate loan amount and repayment capacity. Indeed, borrowing the right amount matters. A surplus borrowing costs unnecessary accumulated interest, fees, and prepayment penalties, while inadequate borrowing may hinder potential business growth. This is called “condition,” one of the 5 Cs that banks use to evaluate borrowers’ creditworthiness.

 

Collateral

5 important things SMEs should understand to apply for guaranteed loans!
5 important things SMEs should understand to apply for guaranteed loans!

Given that the condition is satisfied, banks also require “collateral” to protect themselves against loan default. The banks typically provide loans worth about 70% of the borrower’s collateral value. The collateral requirement is one of the main challenges for borrowers’ access to loans from banks. According to IFC, of all small and medium enterprises that approached banks for loans, 66% were rejected because of lacking collateral requirements. This is why CGCC comes in. CGCC provides credit guarantees to banks to act as collateral on behalf of the borrowers. CGCC’s PFIs can assess the borrower’s creditworthiness by treating the credit guarantee as the borrower’s collateral. This reduces the collateral burden for the borrowers when applying for loans.

 

Capacity

5 important things SMEs should understand to apply for guaranteed loans!
5 important things SMEs should understand to apply for guaranteed loans!

The ability to repay the loan is the fundamental requirement for the bank to approve a loan. Regardless of satisfactory conditions and collateral or CGCC’s guarantees, the banks would not lend, and CGCC cannot guarantee if the borrowers cannot prove that they can repay the loans. So how can the borrower justify the “capacity” to repay? Again, this is when a reliable business plan and financial record can come into play. A proper financial statement tells the borrower’s assets, liabilities, equity, income, and cash flow which are reliable sources to evaluate the repayment capacity. Plus, the business plan describes the future business trajectory in which future income can also be used to justify the repayment capacity.

 

Capital

5 important things SMEs should understand to apply for guaranteed loans!
5 important things SMEs should understand to apply for guaranteed loans!

If banks provide business loans, they want to know how much own “capital” the borrower put into the business. This matters because it shows the borrower’s commitment to the company where the loan proceeds will be used. It shows “skin in the game.” How can the borrower master this? The proper financial record should show the owner’s equity in the business. Official supporting documents such as partnership agreement and company registration are valid evidence of the borrower’s investment in the company. Usually, banks find it more challenging to assess informal or unregistered businesses because they lack reliable sources of the document to validate their creditworthiness. That is why businesses are encouraged to register to improve their access to finance.

Character

5 important things SMEs should understand to apply for guaranteed loans!
5 important things SMEs should understand to apply for guaranteed loans!

Another criterion to prove the repayment capacity is the “Character” of the borrower. Notably, banks investigate the borrower’s credit records, including loan repayment history, number of loans, and current loan outstanding, etc. The primary purpose is to assess the borrower’s trustworthiness. Currently, Cambodia Credit Bureau (CBC) provides comprehensive credit reporting on individuals and businesses, which is helpful for banks to evaluate the borrower’s character. However, in some instances, if your credit records are not favorable, you need to strengthen other Cs to convince the banks. For example, during the COVID-19 Pandemic, many businesses face challenges leading to late debt repayment and loan default, adversely impacting their “Character” and “Capital.” In this case, to get loans, the borrowers need to demonstrate a solid business plan which can improve “Condition” and “Capacity” and utilize CGCC’s credit guarantees which can improve “Collateral.”

 

As we can see, the 5Cs – condition, collateral, capacity, capital, and character – are important factors that banks evaluate the borrowers before deciding to lend. Improving the 5Cs increases the chance of getting loans from banks. A reliable financial statement and business plan can be used to validate every Cs, while a credit guarantee can help address the “Collateral” issue.

Dissemination Seminar on “Guaranteed Loans to support SMEs Development in Tourism Sector”

On 01 September 2022, Ministry of Economy and Finance and CGCC organized a Dissemination Seminar on “Guaranteed Loans to support SMEs Development in Tourism Sector” in Kampot Province, in collaboration with the Ministry of Tourism, through the provincial department of tourism, and SME bank, which was  participated by more than 50 business owners in the tourism sector.

This seminar was presided by Mrs. Chin Sopheakla, Deputy Director of Kampot Provincial Department of Tourism, Mr. No Lida, Deputy CEO of CGCC, and Mr. Neav Sokun, Chief Operation Officer of SME Bank.

Dissemination Seminar on “Guaranteed Loans to support SMEs Development in Tourism Sector”
Dissemination Seminar on “Guaranteed Loans to support SMEs Development in Tourism Sector”

Through this workshop, SMEs in the tourism sector, including resorts, hotels, guesthouses, restaurants, etc., were informed about the benefits of getting guaranteed loans, in response to the lack of collateral when applying for loans for the purpose of improving and recovering their business that are impacted by COVID-19 pandemic.

SMEs also learned about government’s financial supporting mechanisms on favorable loans conditions such as low-interest rate through SME Bank and guaranteed without collateral by CGCC.SMEs can request for guaranteed loans for their tourism related businesses through CGCC’s “Co-Financing Guarantee Scheme for Tourism Sector” that act as collaterals for business loans in the tourism sector through “Tourism Recovery Co-financing Scheme” of SME Bank.

Detail of “Co-Financing Guarantee Scheme for Tourism Sector”: https://www.cgcc.com.kh/en/co-financing-guarantee-scheme-for-tourism/

Dissemination Seminar on “Guaranteed Loans to support SMEs Development in Tourism Sector” organized by CGCC on 1 September 2022 in Kampot Province
Dissemination Seminar on “Guaranteed Loans to support SMEs Development in Tourism Sector”
Dissemination Seminar on “Guaranteed Loans to support SMEs Development in Tourism Sector” organized by CGCC on 1 September 2022 in Kampot Province
Dissemination Seminar on “Guaranteed Loans to support SMEs Development in Tourism Sector”

Rules in works for loans from tourism recovery scheme

The government is developing a set of procedures and conditions for tourism-related businesses to obtain a certificate of collateral from the Credit Guarantee Corporation of Cambodia Plc (CGCC) and receive credit from the recently-launched $150 million Tourism Recovery Co-Financing Scheme (TRCS).

The TRCS was financed by a counterpart fund between the government and financial institutions, with $75 million of the national budget to be disbursed in the form of loans issued by state-run Small and Medium-sized Enterprise Bank of Cambodia Plc (SME Bank), and the other $75 million through loans made via commercial banks and microfinance institutions (MFI).

At a June 24 meeting on the matter, Ministry of Tourism secretary of state Song Tong Hap stressed that the procedures and conditions must support the TRCS – rolled out on May 17 – to restore the tourism industry and promote growth.

Tong Hap, who also chairs a sub-working group on tourism industry and labour support, noted that the CGCC launched the Co-Financing Guarantee Scheme (CFGS) on September 22 to provide credit guarantees on business loans, to share risk with lending institutions and foster financial inclusion.

Key offerings of the TRCS include a maximum interest rate of 6.5 per cent per annum, a 12-month grace period, loan term of up to seven years, loan amount of up to $400,000 and the option of receiving funds in either riel or US dollars. According to Tong Hap, no collateral is required either.

He believes that the TRCS, combined with the CFGS, will be an important financial tool to quickly align tourism recovery with the ministry’s expectations that Cambodia will receive seven million foreign visitors and see 11 million domestic trips by 2023.

CGCC deputy director-general No Lida said that the tourism business must meet a number of qualifications, such as: have more than 50 per cent local ownership; be registered with the tax authorities “after obtaining a credit guarantee”; and demonstrate the ability to repay.

He said these businesses can obtain a Letter of Guarantee (LG) by contacting the institution where they applied for the loan, which will in turn request the LG from the CGCC.

Thourn Sinan, chairman of IMCT Co Ltd and Pacific Asia Travel Association Cambodia chapter (PATACC), voiced confidence that the procedures and conditions would be “very attractive” for tourism-related businesses, noting that the industry still faces hurdles in the loan application process.

“The tourism ministry has really worked hard to help tourism businesses. But in the past, we’ve faced some issues, for example, when SME Bank announced an interest rate of 6.5 per cent, but when our members went to apply for a loan, the rate instead stood at 7.5 per cent, and more financial sustainability reports were required, and this is what we’re worried about,” he said.

(Article from Phnom Penh Post: Publication on 26 June 2022)