Wednesday Jun 17, 2026
Wednesday Jun 17, 2026
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On the one hand, banks mobilise the savings of individuals as deposits. On the other hand, they lend those funds to businesses and individuals for investment and other financial needs. In this process, banks assume significant risks, particularly when lending to first-time entrepreneurs. Experience has shown that many such ventures fail during their initial years, leading borrowers to default on repayments. Some defaults occur for genuine reasons, while others are wilful
Sri Lanka’s economy is still facing certain challenges. However, credit growth in the banking sector has been enormous year-on-year, and the country needs to take measures to channel most of this expansion towards Small and Medium Enterprises (SMEs), as this sector generates over 50% of Sri Lanka’s GDP.
Today, large business giants such as Samsung, Apple, and Microsoft began as small businesses and gradually developed into the global corporations they are today. In fact, a healthy SME sector can contribute to improving entrepreneurial skills among the general population, thereby augmenting human capital, which is a prerequisite for sustainable growth.
Although certain characteristics of SMEs can be advantageous, in some areas their nature can become a challenge. One of the key obstacles is limited access to finance for the development of their enterprises.
Many SME entrepreneurs in the low-income bracket do not have sufficient capital to invest, although they possess creative ideas and strong entrepreneurial skills. This is where banks have a major role to play in supporting poverty alleviation and economic development in the country.
In contrast, if you are operating a small or medium-scale business and need to borrow money from a bank to establish or expand your business, you will realise that nothing is more frustrating than spending time applying for a business loan only to have your application rejected. To avoid such frustration, SME borrowers need to understand how to prepare themselves properly. Of course, even with all the necessary preparation, a request may still be rejected. However, if you know what is required in advance, you can at least avoid the frustration caused by lengthy delays.
You need to understand:
1. How to find the best business lender.
2. What information you should provide to the lender in a timely manner.
Sometimes people criticise banks, claiming that they are not doing enough to support small and medium-scale entrepreneurs. Nevertheless, they should understand that banks play the role of financial intermediaries in the economy, and therefore their responsibilities are far more complex than the average person may realise.
On the one hand, banks mobilise the savings of individuals as deposits. On the other hand, they lend those funds to businesses and individuals for investment and other financial needs.
In this process, banks assume significant risks, particularly when lending to first-time entrepreneurs. Experience has shown that many such ventures fail during their initial years, leading borrowers to default on repayments. Some defaults occur for genuine reasons, while others are wilful.
Inadequate income due to poor market conditions and continuous losses that erode working capital are among the most common problems faced by new small and medium-scale entrepreneurs. Diversion of funds for purposes other than those intended is another common mistake made by such business owners.
In order to assess the suitability of a lending proposal, banks must conduct a thorough appraisal. For this purpose, they need to consider several factors. Among these, the most challenging is the market, which is constantly changing. Competition, pricing, consumer behaviour, and other factors have a significant influence on market conditions.
Conditions that appear favourable for an industry or business at the time of appraisal may become adverse later due to changes in these factors.
When selecting a bank to deal with, it is important for an applicant to have a clear understanding of the facilities and services available from the chosen banker.
Three common types of facilities available for SME’s are:
First and foremost, the applicant should determine the purpose for which the facility is required, such as a working capital facility, equipment loan, building loan, or any other type of loan or overdraft. The applicant should have a clear understanding of the documentation, projections, narratives, and other information that the banker will require to prepare a well-documented loan proposal and secure the best financing package available.
The applicant should also be aware that the bank will focus on the following areas when assessing the requirement, reliability, and repayment capacity of the borrower:
1. Real requirement of the loan size
2. Market potential of the product and the profitability
3. Cash flow history and projections for the business
4. Credit history of the Business and the Borrower
5. Character of the borrower
6. Collateral available to secure the loan
To provide evidence for the first four items listed above, the banker will require the project’s financial plan, business and personal financial statements, income tax returns, and a business plan.
Lenders will want to review both the credit history of the business (if it is not a start-up) and the applicant’s personal credit history. Hence, it is always recommended that the applicant obtain a Credit Information Bureau (CRIB) report on both himself and his business before applying for credit. If any inaccuracies or problems are identified, some of them can be corrected before they adversely affect the loan application.
Now let us try to understand the factors a borrower should consider when selecting a lender and the key aspects that differentiate one lender from another.
Sometimes people criticise banks, claiming that they are not doing enough to support small and medium-scale entrepreneurs. Nevertheless, they should understand that banks play the role of financial intermediaries in the economy, and therefore their responsibilities are far more complex than the average person may realise
1. Flexible funding options
As most of us know, banks are not exactly the most flexible institutions when it comes to lending money, nor can we expect them to be 100% flexible. They usually expect prospective borrowers to demonstrate a strong financial commitment to the business, provide substantial collateral, and have an established business history. They may also be reluctant to finance highly expensive or sophisticated equipment.
Nevertheless, the lender you work with should offer a reasonable level of flexibility to make the borrowing process as hassle-free as possible. As an SME owner, your funding requirements and risk appetite may vary over time. Your financial needs this year may differ significantly from those of the next year due to various internal and external factors.
The best lender will understand your requirements and offer different types of loan and advance products to suit your needs.
2. Conduct background research
Discuss with friends and business associates about their experiences with different lenders to determine whether the lender made the borrowing process as smooth and hassle-free as possible.
However, no two borrowers are in exactly the same situation, and therefore you will receive a variety of opinions and perspectives. Ultimately, you must exercise your own judgement.
3. Does the banker listen and respond to your needs?
Financing can be a stressful process, so you should ensure that the lending bank is willing to listen to your story with an open mind and provide support.
Do not be afraid to educate your banker. Arrange for the banker to visit your project or business. Share your business plan. If the banker requests information, provide it promptly. The banker cannot assist you without adequate information.
If the banker appears uninterested in understanding your business, you may be dealing with the wrong person.
4. Is the banker knowledgeable, interested, and proactive?
The bank should employ staff who are highly knowledgeable and capable of understanding your business needs.
Your account manager may not be the person who makes the final decision on your loan request, but he or she should be your advocate when presenting your proposal to the approving authority.
Your account manager should understand who you are, what your business does, and should actively support your case within the bank.
5. Compare the terms offered by different lenders
Analyse all the information you have gathered about different lenders and make meaningful comparisons.
Consider factors such as:
6. Customer service
One of the most important aspects of a lender is the quality of customer service provided to clients.
The lender should be easily accessible through various communication channels, including telephone, email, live chat, or other online facilities. Staff should be friendly, courteous, professional, and responsive.
Financing can be a stressful process, so you should ensure that the lending bank is willing to listen to your story with an open mind and provide support. Do not be afraid to educate your banker. Arrange for the banker to visit your project or business. Share your business plan. If the banker appears uninterested in understanding your business, you may be dealing with the wrong person
7. Types of products available
Applicants should have a good understanding of the products available with a lender.
No two businesses are the same, and neither are their borrowing requirements. Whether it is a short-term loan, medium-term loan, long-term loan, lease facility, overdraft, or any other product, the lender should be able to provide a solution that matches your needs.
Developing a long-term relationship with your banker
Borrowers should also have a plan of action designed to achieve their long-term objectives.
a) As a borrower, you should communicate regularly with your banker, not only when you require assistance or encounter difficulties. Proactively share information on your business performance, market conditions, future plans, and challenges. This helps build trust and credibility.
b) As a borrower, you should have a thorough understanding of your numbers. You should be familiar with your sales volumes, profitability, stock levels, cash flow, and other key performance indicators. You should also be clear about your future plans.
c) As a borrower, you must maintain transparency. Disclose any losses incurred and the challenges your business is facing. By adopting this approach, your banker will develop greater confidence in you. Hiding information can damage long-term credibility. Furthermore, meeting obligations on time and adhering strictly to loan agreements will build a strong track record and make your banker more willing to support you during difficult periods.
d) As a borrower, you should educate your banker about the key aspects of your business. Invite the banker to visit your operations. This will enable the banker to gain insights that may not be evident from financial statements and reports alone.
e) Seek your banker’s advice on business trends, industry developments, and growth opportunities. This collaborative approach will help develop a mutually beneficial partnership between the borrower and the banker.
Finally, borrowers should understand that while they seek competitive rates and favourable terms, the relationship must also be profitable for the bank. Only then can it become a true win-win relationship.
(The author is a senior banker who served in the corporate management of a leading private bank in Sri Lanka before retirement. He currently serves as a Non-Executive Independent Director of the Regional Development Bank of Sri Lanka. He is a Fellow Member of the Institute of Bankers of Sri Lanka (FIB), an Associate Member of the International Professional Managers Association (UK), and holds a Diploma in Management from ICFAI University, India. He is also a member of the Institute of Directors Sri Lanka)
