Precise and neat applications crucial for getting a Development Bank loan
The Development Bank of Namibia (DBN) is often criticized by promoters of applications who do not receive finance. This criticism is based on the premise that DBN finance is an entitlement. Actually DBN finance is granted on an exacting set of requirements, and done fairly and transparently in accordance with sound business principles.
The Bank’s decision
As the Bank has limited financial resources, finance is approved for enterprises that are most likely to fulfill its mandates of creating employment, spreading ownership to formerly disadvantaged Namibians and stimulating enterprise in regions that need greater levels of economic activity, among others. If the Bank is satisfied that the enterprise fulfills these requirements, it will consider the viability of the proposal. If the proposal is not viable, the application will be declined. There are two reasons for this.
In the first place, DBN finance must be allocated to businesses with long-term prospects. It makes more sense for the bank to finance long-lived enterprise than enterprises that present the possibility of a short lifespan.
In the second place, the Bank has to consider the financial security of the prospective shareholders and their dependants. The Bank assesses applications to avoid finance for enterprises that may pose an undue risk to applicants and shareholders. If an enterprise goes bankrupt, this will be disastrous not only for applicants and their families, but also for employees of the enterprise, and of course, it will be a loss for the shareholders. The wisdom of this approach can be seen in the fact that most enterprises financed by DBN are still in operation today.
Planning for a successful application
The Bank’s primary assessment is based on a sound business plan that demonstrates that the applicant has considered a wide range of operational and managerial aspects, in addition to realistic cash flow projections. The process of developing a business plan is complex. Unfortunately, many promoters sidestep the effort by relying on consultants without making their own contributions to the plans. These standard business plans are easy to recognise, and an interview with the applicant can quickly confirm the reality of the plan and the applicant’s understanding. The Bank recognises that consultants can alleviate the burden for clients, but strongly urges applicants to take an active role in developing the business plan to ensure that the plan is realistic and reflects the abilities and experience of the applicant. In this regard, CVs of applicants and managers are also very important. The bank has seen different business promoters advancing similar business plans which could be an outcome of plans developed by same consultants.
Time to decide
Due to the developmental nature and complexities of projects DBN considers, thorough due diligence and reference checks need to be carried out. DBN may also spend time assisting the applicant to restructure a business concept and implementation strategy to improve the risk profile and the projects bankable. This can result in a longer time to make a decision. Unlike applications for personal finance, for instance a car loan , overdraft or even a mortgage loan, where a bank only considers the salary and expenditure patterns of the applicant, business loans are complex because business revenue, the source of repayment, can be adversely impacted by various factors that DBN needs to consider.
Innovation and competitive business
One of the hallmarks of DBN, is that the Bank will entertain business projects that are innovative, provided that the business plan is carefully considered. This extends beyond innovation, and also considers competitive elements. The Bank is often faced with applications that emulate similar enterprises in the same immediate vicinity. Finance for this type of application is not developmentally sound as it places at risk existing enterprises and their employees.
The Bank gives preference to enterprises that fill gaps in the market, and bring new capacity and different forms of economic activity and social benefits to areas that are under-serviced. DBN also gives preference to projects that make better use of Namibian resources or that improve economies of scale and other efficiencies on an industry basis. One of the problems that the Bank often faces is finance applications for similar enterprises. If applications are similar, the Bank gives preference to the application with the most sound business plan. The Bank however treats every single application as confidential.
In terms of its governance rules, the Bank ensures that each application is treated impartially. Decisions are taken by a series of committees that consider the business plan, the risk and credit aspects. This ensures that no one person takes the final decision, and that the widest possible range of expertise is bought to bear on the application. Large multimillion capital applications are examined by and subject to approval of the Board of the Bank. The Bank places Namibia first, and has a duty to ensure that the enterprises that it finances are sustainable. However the Bank cannot take responsibility for the quality of the applications that it receives, only the quality of the decision. Applications are not necessarily declined because of uncertain business prospects, but can also be declined due to qualifications and experience expected by the Bank.. This is a reality of the risk management exercise. DBN must however make decisions on the evidence presented in applications, and make its decisions with a clear conscience. Although the process of application is exacting and time consuming, those enterprises that are financed by DBN have a greater than average likelihood of success.