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Overseas Banking for Expats - Getting a Bank Loan for Commercial Use
The situation varies hugely from one country to another, and do make sure you get country specific advice and guidance BEFORE you start making too many plans and commitments. Remember to ALWAYS consult a good and recommended local accountant at the very earliest stages of your journey down this road.
Even so, there are some practical things that apply to many expat overseas destinations.
The first obvious question is, “what is the difference between a personal and commercial loan?”
Well, there could be dozens of highly technical answers to that one but for the sake of this discussion we’ll use a simplified definition of a commercial loan as one where an expat is asking a foreign bank overseas for a loan that is
- For commercial purposes such as starting or expanding a business and
- To be repaid in part or total by income generated by the business.
Whether you’re a newly arrived expat or a local, all banks everywhere view commercial loan requests with some misgiving, though their publicity may pretend otherwise!
It is all to do with their perceptions of risk. All banks that lend money have to take into account the possibility that they may not get it back. Their assessment of the risks of this happening in part dictates whether or not they’ll lend the money.
In the case of many personal loans, the risks are assessed based on “how much is this person earning each month?” and “can they afford the repayments?” For many personal loans it can be quite easy to see the answers to those questions, but pity the poor banker sometimes trying to understand that in the case of many commercial loan requests!
Clearly we’re not talking here about the Chief Executive of a major oil company asking for 50million to build a new terminal – there the banks can see the reality easily enough.
Where the banks have trouble is when a private individual walks in with a new commercial idea for (e.g.) a free-range chicken farm and wants money to pay for it. Banks can’t always easily see what the real financial position is with a very small company or a start-up business. The risks for them are higher, and they become nervous as a result.
None of the above relates specifically to expats, overseas banking or foreign dealings – it is true for banking just about anywhere. Yet there are specific issues that expats need to consider.
Expat commercial loan requests are a very specific problem for many overseas banks. Some overseas bankers refer privately to many expats as “dreamers” and accuse them of having “crackpot schemes” which not only cause the bank headaches but which are also doomed to failure.
Is this fair?
Many expats arrive in their new country with wonderful ideas about making a living. They are often ambitious and fired up with energy and enthusiasm. That’s all great and banks LOVE to see those things in people looking for commercial loans to start-up a business etc.
Unfortunately, many also have only a very limited knowledge of the area they’re moving to, its environment or the local economy. This generates a naïveté that may be charming but which to put it bluntly, can also scare the pants off a local banker in terms of lending money!
As an example, an expat asking for a loan to open up a small hotel in an area where the statistics show tourism is in sharp decline, is likely to hear the local equivalent of “NEXT!” very quickly during their meeting with the bank.
As another example - loan requests from expats with no agricultural background whatsoever, asking for money to start an agricultural businesses in areas where there is a long history of farming failures, are equally likely to be consigned by the bank to the ‘crackpot’ file and not taken seriously.
It is also worth remembering that in many countries a massive percentage of banking is based upon personal relationships. People who ‘know someone’ in the local bank are much more likely to succeed in getting this type of loan than the average expat that has just walked in off the street.
So, what can the expat do? You have the idea, you have the drive, you are ready to put in all the hours required, and all you need is a little cash.
The good news is that commercial loans can be made available. You just need to know how to ‘play the game’. Here are a few basic tips to get you started on the road to that loan and your final dream...
1. Unless you’re an expert in the local banking system, don’t try and do it all yourself. Many guidebooks will tell you to prepare a ‘business plan’ and take it to the bank. That’s fine, but not as the first stage. Nothing turn bankers off faster than having a 45-page business plan being banged on their desk by an unknown foreigner with a letter saying in effect “please can we have a lot of money?”
2. Don’t go to the bank until you’ve done extensive research, know your facts, AND have got yourself some specialist local advice. An excellent idea to start is to secure a good local accountant. Get local business people to recommend one and not just the expat community – remember an overseas accountant much loved by the expat community may be great at expat pensions and taxes, but very inexperienced at securing commercial loans.
3. Be prepared to go to a loan broker. In many countries it is very common to use an intermediary who can ‘work the system’ for you. Behind the scenes they’ll use their existing relationships and shake a few hands to get you into a bank that’s willing to listen. They can sometimes also help secure your loans. Yes they’ll take a fee, but it may be money well spent. Remember in general NEVER pay anything to a broker or bank in advance – pay them not on promises or “nearly there” statements but only on results once you have secured the loan. Again, get local business people’s recommendations.
4. Don’t rush your bank request. Your credibility and ‘face’ is critically important overseas. An expat who rushes in a poorly thought through or hastily put together letter or plan is going to run the risk of being tagged as unprofessional. Be warned, overseas once this tag is attached to an expat it can be VERY difficult to shift that perception!
5. In conjunction with your accountant and/or broker, have an initial scoping discussion with the bank. Don’t march in to your first meeting with a letter demanding huge sums of money – run the basic principles and ideas past them first perhaps with a 1-2 page summary, and let it ‘sink in’ so they can have a think about it. Let them get a feeling for you and of course vice-versa.
6. After an initial discussion you may get asked to submit a detailed proposal. Take advice from your accountant or broker about formats for this type of document so as they meet local expectations. In general, avoid qualitative statements such as “it’ll generate a lot of money” and concentrate instead on figures because maths and figures are international and all bankers everywhere want to see figures rather than vague promises.
7. Just like back home, ANY banker will want to see how much of your own money you’re putting into it. The less you put in, the more scepticism you can expect to see in return. They will allow a little for the fact you’re putting your time, brainpower and muscle into it, but that may count for less overseas than it does in the UK.
8. It should go without saying that when you submit your request to a local bank it MUST be the local language unless you want to see it go directly into the bin unread. Sadly, not all expats grasp this and it is not unknown for documents and letters to be presented in English in the mistaken belief that “everyone speaks English”! If necessary, pay for a good translation – DON’T get a local school child or amateur to do it for you in an effort to save a small amount of money. It will be a false economy!
In the case of commercial loans you may well be asked for security against default. Due to legal problems in cross-border enforcement, few if any overseas banks will accept security against property you own back in the UK and may look to property or assets you hold locally. BE CAREFUL – NEVER sign anything to do with security guarantees unless your accountant or local lawyer has checked it first.
Remember again that banks everywhere are looking for good well-prepared ideas that will work and make them money. They are usually prepared to back those ideas with money, advice and help. You can benefit HUGELY from that and tap into it if you prepare thoroughly beforehand and play the game their way.
Go for it and good luck!