1. Loan Officer Training: How to Assess a Client Business Almaty, 2010 Loan Officer Training: How to Assess 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. Almaty, 2010 Real support – to real business! www.kmf.kz

2. Evaluate the Following Criteria During the Client Business Assessment Business location / sales outletsBusiness location / sales outlets Business type and its turnover/ type of goods or servicesBusiness type and its turnover/ type of goods or services Legality/legal statusLegality/legal status Demand/seasonalityDemand/seasonality Range of goods/business volumeRange of goods/business volume SuppliersSuppliers Business costsBusiness costs Credit history/debtsCredit history/debts 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

3. Components of the Business Assessment: The “Five C’s” CharacterCharacter CapacityCapacity CapitalCapital CollateralCollateral ConditionsConditions

4. “C #1” - Character Assess the personal reputation of the business owner: Reputation and place in communityReputation and place in community Residence legalityResidence legality Type of dwelling (property, quality)Type of dwelling (property, 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 history (money-lenders, family, suppliers, relief fund)Credit history (money-lenders, family, suppliers, relief fund)

5. “C #2” - Capacity Assess the viability of the business: Assess 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

6. “C #3” - Capital Assess the liquid financial resources of the business: Client financial resources:Client financial resources: –Equity –Borrowed funds Percentage of sales on creditPercentage of sales on credit Turnover by days (cycle of business activity)Turnover by days (cycle 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

7. “C #4” - Collateral 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 guaranteePsychological importance of a guarantee Guarantor’s ability to repay indebtednessGuarantor’s ability to repay indebtedness Borrower’s and guarantor’s motivation/willingness to repay indebtednessBorrower’s and guarantor’s motivation/willingness to repay indebtedness

8. “C #5”- Conditions Conditions affecting business but being beyond businessman control. For example, business seasonality, competitiveness, inflation, access to suppliers, abnormal climatic conditions (non-characteristic for this region severe frosts or strong heat), business or marketplace construction/ destruction. 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 business:Take into account the loan conditions that apply to specific business: –Amount; –Maturity; –Seasonality; –Other;

9. Potential Problems to Avoid During the Business Assessment Cheating: false business etc.Cheating: false business etc. FraudFraud Intermediaries (“clients” who take credit for another person).Intermediaries (“clients” who take credit for another person). Inaccurate or incomplete information obtained from a clientInaccurate or incomplete information obtained from a client Discrepancies between what Loan Officer “sees” in the market during the visit and reported financial dataDiscrepancies between what Loan Officer “sees” in the market during the visit and reported financial data Not taking into account business-cycle and business seasonalityNot taking into account business-cycle and business seasonality Untimely salary disbursement in budget organizationsUntimely salary disbursement in budget organizations Inaccurate understanding of family involvement in business (i.e. when a business spends a lot from family income)Inaccurate understanding of family involvement in business (i.e. when a business spends a lot from family income) Inaccurate assessment of how loan will affect future business growthInaccurate assessment of how loan will affect future business growth Insufficient time and attention is attached to how a client will use loan (e.g., to buy goods, change prices; wholesale purchases; expansion through entering new markets—opening additional outlets etc.)Insufficient time and attention is attached to how a client will use loan (e.g., to buy goods, change prices; wholesale purchases; expansion through entering new markets—opening additional outlets etc.)