Tag Archives | bankers

How to Get a Loan When Banks Aren’t Lending

how to get a loan when banks aren't lending

You need capital, but you’re having trouble securing the financing you need.  So how to get a loan when banks aren’t lending?

This situation reminds me of the famous NBC Television show, “The Office”, the hilarious documentary-style show that comments on the life of a standard corporate office. If you haven’t seen the show, I’d definitely recommend it.

In one of the episodes, the antagonist and regional manager, Michael Scott, has worked at Dunder Mifflin Paper Company for over 19 years and quits (spoiler alert!). He decides to start his own paper company with almost no capital, along with two other employees in the office who also quit. Slowly, he takes clients away from Dunder Mifflin and grows in revenues. As a result of his sudden growth in clients, he buys a van and wakes up at 3 in the morning to distribute the paper in the area.

After consulting with an accountant, he finds out that he has to declare bankruptcy because he was growing the business too fast, and that the revenues would not cover the growth of the business. They required wages, rent, and variable costs associated with manufacturing and distributing the paper. Because of the digital age, the demand for paper wasn’t so hot either.

What happens when we grow ourselves out of business? Michael’s problem was simple: he had no outside investors, and zero loans from the bank. Therefore, he had no money to cover the fast expansion. Sound familiar? In this article, we will discuss how to get a loan from the bank when they aren’t lending.

Don’t lose track of your company’s metrics. For advice on how to identify your KPIs and how to track them, access our free KPI Discovery Cheatsheet!

Bank Lending Cycle: A Recap

Last week, we discussed the bank lending cycle and why banks may tighten their lending. There are two reasons why that might happen…

Loans and the Economy

If the economy is undergoing or overcoming a financial crisis, banks tend to lend less. During this time, businesses might have to look elsewhere for financial assistance.

Conversely, if the economy is booming and the lending environment becomes less risky, banks might lend more. These periods are characterized by lower interest rates and better terms.

But what happens when things are looking up? It’s easier to obtain a loan because of the economy, but with all the capital in the marketplace, an economic bubble builds. After a while, that bubble will burst and we’ll find ourselves in a financial crisis again.

 The Environment affects the Economy

The economy may affect the environment, but the events in the environment also affect the economy. We used the housing market crisis in 2007 as an example. Imagine walking into your job the next day, without reading or watching the news, expecting to make a sale. Yikes! You have to know your environment to make good investment decisions.

How to Get a Loan When Banks Aren’t Lending

We discussed the cyclical nature of bank lending and how to understand the industry. Now, we will analyze how to best appeal to the bankers and how to get a loan when banks aren’t lending. Regardless of the economy, the banker still has to evaluate how risky the investment is. What is the best way to appeal to bankers? Preparing a package of these five things will get you there:

1. Know Your Economics

Preparing at least three years of business financial statements and one or two years of financial projections goes a long way. In addition, you should also list out how you will use the loan. By preparing a projection of financial statements, this should be easy.

2. Build Sound Business Credit

Knowing where you stand with your credit is useful. If there are any inaccuracies, you can correct them without having the bank check and deny you a loan. If you have lower credit than you had originally hoped, maybe you can hold off on applying for a loan until you are ready.

3. Provide Documentation of Personal Loans

Providing documentation of personal loans is equivalent to providing evidence and saying, “I am worthy of your loan!” Personal loans, business loans… they both demonstrate that you owe someone money, and showing the history of your loan relationships indicates the type of relationship you might have with the bank.

4. Prepare Questions

In a way, preparing a package for the bank should answer all the questions they might have. This includes “how much money do you need,” “how long might you need this loan,” “what will you use it for,” etc.

5. Log Prior Experience

This is less about numbers and more about character. Logging your experience in companies, vendor relationshipslender relationships, and references shows more than how much money you have or will have. It shows the commitment and effort of a borrower.

Other Sources of Loans

Don’t put all your eggs into one basket. Have a backup plan just in case banks really aren’t willing to loan anything to your company. Smaller businesses are less likely to obtain a large loan from a bank if they are less than 10 years old.

SBA Loans

SBA is the Small Business Administration. They provide loans if you’re starting up a new company, or even if you just want to expand your business. Basic 7(a), Certified Development Company (CDC) 504, and the Microloan program are examples of the loan programs they provide.

Personal Loans

It may not seem much, but $20 from your family members adds up. Using your savings and other means of personal loans, you can finance yourself through startup costs. Just make sure not to forget about your payments, or run your credit too high!

Conclusion

In conclusion, banks won’t loan to just anyone… and sometimes that’s not your fault. Sometimes, it’s just bad timing. What happens in your environment isn’t up to you, but it is your responsibility to stay updated on those facts. Creating a package for your business will increase the likelihood that you’ll get a loan because you’ll be making the bank’s life easier. Rather than them scrambling to find your information, you can simply lay it out for them. And if all else fails, banks are not the only source of loans. With a bit of ingenuity, you can get there.

Save your time and prepare for the future now. Know your numbers and where your company is the weakest. The best way to start doing that is to download our KPI Discovery Cheatsheet today!

how to get a loan when banks aren't lending

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

how to get a loan when banks aren't lending

Share this:
1

London Interbank Offered Rate (Libor) Controversy

London Interbank Offered Rate (Libor) Controversy (June 2008)

Presently, there are two issues regarding the London Interbank Offered Rate (LIBOR). First, dollar Libor quotes are considered too high compared to the federal funds rate. Second, elevated Libor quotes are considered too low compared to other market-based interest rates.

British Bankers’ Association (BBA) Reaction (bba.org.uk)

The British Bankers’ Association (BBA) reviewed the situation and decided to alter the process for setting Libor. Possibly by fall 2008, the British Bankers’ Association will increase the number of banks that contribute the rates that comprise the London interbank rates. Using more contributor banks would give a more accurate average rate. Also, the British Bankers’ Association plans to increase the scrutiny of the contributed rates to ensure their validity. Changing Libor bank rates in any way is a challenge, legally and financially. Hundreds of trillions of dollars in financial contracts around the world depend on the Libor benchmark.

Libor Federal Funds Spread

Regarding the first issue, the federal funds rate is currently at 2% and the short-term dollar Libor rate is significantly higher. Actual Libor bank rates fluctuate and differ by maturity, but the overnight dollar Libor rate was recently at 2.48%. US banks can raise dollar funds from the US Federal Reserve. European banks cannot. This implies that US banks can raise dollar funds more cheaply than European banks. Dollar Libor is calculated using rates contributed by 3 US banks and 13 European banks. Because there are more European contributor banks than US contributor banks, the dollar Libor rates are skewed to the higher European rates. The BBA is considering publishing a separate index to represent dollar Libor quotes for European banks.

Validity of Libor

Recent rises in Libor lagged behind rises in other market-based interest rates. This raised suspicion regarding the validity of Libor. Some suspect contributor panel banks were underreporting their borrowing costs to avoid looking desperate for cash.

Contributor panel banks submit borrowing rates to the BBA each weekday. Some analysts suspect that contributor banks are submitting rates lower than the true borrowing rates. Banks may be reluctant to reveal that they are paying higher borrowing rates, which might indicate less creditworthiness. Lower than expected Libor rates could be evidence that some banks are submitting lower than actual borrowing rates. The financial markets expect the US Federal Reserve to raise its key interest rate later this year. This is influencing rises in short-term treasury yields and money market borrowing rates. In this environment, Libor rates have not gone up as much as expected.

Today’s Libor Index

For the dollar Libor rate today and other Libor current rates, go to: bankrate.com.

Download your free External Analysis whitepaper that guides you through overcoming obstacles and preparing how your company is going to react to external factors.

london interbank offered rate (libor)

Strategic CFO Lab Member Extra

Access your Projections Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

london interbank offered rate (libor)

See Also:
LIBOR
Libor versus Prime Rate
Annual Percentage Rate
Required Rate of Return
What are the ‘Twin Deficits’?

Share this:
0

Financial Instruments

See Also:
What is a Bond
Required Rate of Return
Return on Asset
Commercial Paper
Hedging Risk
Histogram

Financial Instruments and Securities

Financial instruments are contracts that represent value. They come in many varieties. In fact, financial managers and bankers have a lot of leeway in creating and issuing financial instruments. The Securities and Exchange Commission (SEC) regulates publicly traded financial instruments; however, the SEC less stringently regulates private placement instruments. Most financial instruments fall into one or more of the following five categories: money market instruments, debt securities, equity securities, derivative instruments, and foreign exchange instruments.


Download The Free Know Your Economics Worksheet


Money Market Instruments

Money market instruments are highly marketable short-term debt securities. Furthermore, money market instruments are generally low-risk investments. Because of this, they offer yields that are lower than riskier stocks and financial instruments.

Often, investors trade money market instruments in large denominations among institutional investors. However, some money market instruments are available to individual investors via money market funds, or mutual funds that pool money market instruments.

Money market instruments include treasury bills, repurchase agreements, certificates of deposit, commercial paper, bankers’ acceptances, Eurodollars, and federal funds.

Debt Securities

Debt securities are longer-term debt instruments. With debt instruments, the issuer is essentially borrowing money from the investor. The investor plays the role of a lender lending money to the issuing entity. Longer-term debt securities often yield higher returns than money market instruments. Debt instruments also represent a claim on the assets of the issuing entity.

Debt securities are often called fixed-income securities. This is because the investor or lender often predetermines the terms of the debt instrument. For example, a debt instrument will be issued with a certain maturity, a certain principal amount, and a set coupon rate. However, while debt securities are often called fixed-income securities, this does not mean they yield a fixed stream of payments – debt securities’ returns can fluctuate and vary.

Examples of debt securities include: treasury notes, treasury bonds, inflation-protected treasury bonds, federal agency debt, international bonds, municipal bonds, corporate bonds, junk bonds, mortgages, mortgage-backed securities, and other types of debt.

Equity Securities

Equity securities represent shares of ownership in a company. In addition, equity securities often come with voting rights. They represent the shareholders’ interest in the issuing company and a residual claim on the company’s assets. This means if the issuing company goes bankrupt and has its assets liquidated, then the equity holders only get their money back after all other relevant claimants have been paid what they are owed.

Equity securities may be traded publicly on stock exchanges, they may be traded in over-the-counter (OTC) transactions, or they may be exchanged and held privately. Types of equity securities include common stock, preferred stock, and American Depository Receipts (ADR).

Financial Derivative Instruments

A financial derivative instrument is a contract that derives its value from an underlying asset or factor. In short, the value of a derivative depends on the value of something else. When the value of the underlying factor changes, the value of the derivative instrument also changes. Derivatives are often used for speculation, for leveraging a position, or for hedging risk.

Common derivatives include futures, forwards, options, and swaps. Common underlying assets or factors include stocks, bonds, currency exchange rates, commodity prices, market indices, and interest rates. However, derivatives can derive their value from almost anything, including weather data and political election outcomes.

Foreign Exchange Instruments

Another category of financial instruments is foreign exchange instruments. These are contracts involving different currencies. There are many currencies in the world, and there are several different instruments commonly used to trade in currencies.

The value of one currency relative to another depends on the exchange rate between the two currencies. Consider exchange rates either fixed or floating. Types of foreign exchange instruments include spot contracts, forward contracts, options, futures, and swaps.

Exchange foreign currencies for investment and speculative purposes and for hedging risk. You can trade foreign currencies all over the world twenty-four hours a day via banks and brokerages. The foreign exchange market is the largest market in the world. Consider speculating in foreign exchange markets very risky.

If you want to increase the value of your organization, then click here to download the Know Your Economics Worksheet.

financial instruments, money market instruments

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

financial instruments, money market instruments

Share this:
0



See Dates