Tag Archives | collateral

Is Your Business Bankable?

Is Your Business Bankable

Businesses call us for many reasons but here are two very common reasons why we get called…

They are growing and want to strengthen the financial function.

OR

They are in financial distress and can’t find a way out.

Why does a business need to be bankable? What does being bankable mean? In this blog, we are going to answer all those questions and advise you how to strengthen your banking relationship (something all businesses need to do).

What metrics are you using to gage your company’s performance? It’s important to identify and track those KPIs. Need help tracking them? Click here to access our KPI Discovery Cheatsheet, and start tracking those KPIs today!

Is Your Business Bankable?

Before we answer the question “is your business bankable?”, what does bankable even mean?

Bankable is a financial jargon that indicates that a business is sufficiently healthy to receive interest from lenders to loan. It’s a basic indicator of a company’s success. If a bank is willing to loan a business cash and/or support a business, then the risk of it failing or not paying is low. A bankable company has significant assets, profits, liquidity (cash), and collateral.

An article from Forbes says it like this, “The bank is your cheapest, but often most difficult, source of capital with which to operate and grow your company.”

So, is your business bankable? There are several things to consider.

Financial health will be the primary focus of determining if your business is bankable. There are other things, such as collateral and the character of the person, behind the loan.

Financial Things to Look for

Financial things to look for:

Non-Financial Things to Look for

Non-financial things to look for include the following:

  • Do you have a strong management team?
  • What does your industry or segment look like (strong, declining, etc.)?
  • Do you have a business plan?
  •  The character of the people behind the company and signing the loan documents
  • Will you provide a personal or corporate guarantee?

If you are unsure, then just ask your banker.

Is Your Business BankableThe Need to be Bankable

We deal with companies that are both highly successful or maybe in a distress situation. If you are successful, then you may want to acquire another company, have a distribution, or invest in CAPEX. In today’s market of relatively cheap access to capital, why would you use your own cash? If you are growing, then you really need to consider a line of credit to help you grow. We see very successful companies in a high growth scenario bleed out of cash and working capital. In those cases, a line of credit would make life so much easier.

 Click here to access our KPI Discovery Cheatsheet, and start tracking your progress to be bankable!

Bankable Business Plan

Now, that you have determined if you are bankable or not bankable, it’s time to put together a bankable business plan. There are several things that banks (and investors) want to see before they invest in your and your company. There are ten sections to a bankable business plan.

(HINT: If you do not have a good banking relationship with your banker, then even the most perfect business plan will not guarantee you will get the capital or line of credit you need/want.)

Value Definition

What ares in your business create value? In a bankable business plan, you need to define your value-generating centers (core-business activities). A successful business will continue to come back to the value that they provide to customers; however, an unsuccessful business will continue to get distracted by other areas of the business that are not generating any or as much value.

Needs Assessment

A Needs Assessment identifies the company’s priorities. It also defines what needs to be accomplished and the steps that need to be taken to achieve the goals. This is a great tool to use to identify what you know and don’t know about your business. Use this process to analyze every part of your business. Score.org provides a Needs Assessment that will gage how well you know your business and your needs.

Differentiation and Competitive Assessment

Porter’s Five Forces of Competition is used in the differentiation and competitive assessment to identify competing products/services and to start the process of differentiating yourself from the competitors. For example, there are 3 companies in Houston that provide the exact same product; however, ABC Co. is working to be bankable. So ABC Co. works to position their product differently and to provide more value than their competitors. Without conducting a differentiation and competitive assessment, ABC Co. risks loosing valuable market share.

Market Analysis

Bankers want to mitigate their risk. Conduct a market analysis to explain exactly that your market is doing. Is it new and expanding? Or is it saturated and declining? This will help explain your company’s growth potential.

Marketing Planning

Put together a marketing plan. Identify how you are going to market your product or service, what your target market is, and how you are going to continue to grow.

Sales and Promotion Strategy

Now, that you have built out your marketing plan, identify your sales and promotion strategy. For example, if a $1 trial for a subscription is critical to your sales strategy, then write that out and explain how it has contributed to your company’s growth.

Organization Design

What does your organization look like? Are you bombarded with too many non-essential personnel or administrative functions? Or is your company designed to optimize all positions to cover both value-adding functions and administrative functions?

Financing Needs

Identify your financing needs. How much do you need to sustain your company? How quickly do you need financing? Answer all this questions

Financial Projections

Next, build out your financial projections. Be sure not to have optimistic projections that are hard to near impossible to accomplish. They need to be realistic, detailed and logical.

Risk Analysis

Finally, what risk does your company have? For example, a company who relies heavily on the oil and gas industry needs to identify what risk they will face if that industry declines.

Conclusion

In conclusion, being bankable is a measurement of success. As previously stated, there are several things you need to watch to remain bankable and profitable. Measure and track those KPIs. Click here to download our free KPI Discovery Cheatsheet.

Is Your Business Bankable
Strategic CFO Lab Member Extra

Access your Flash Report Execution Plan in SCFO Lab. The step-by-step plan to maximize profits.

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

Click here to learn more about SCFO Labs

Is Your Business Bankable

0

What Your Banker Wants You To Know

What Your Banker Wants You To Know

In small or large businesses, we often end up dealing with banks and bankers beyond the checking account. When you have debt with your bank (your lender), the relationship takes on another dynamic. The typical loan agreement for traditional debt includes loan amount, terms, collateral provided, the covenants you must live by, and the dos and don’ts allowed. When things are going well, the relationship with your banker seems to always go well.  It is in difficult times that things get tough. Let’s look at what your banker wants you to know.

Growth is good, but it requires more capital to sustain. Learn about the 25 Ways to Improve Cash Flow (in addition to acquiring capital from the bank).

What Your Banker Wants You To Know

Your banks wants to know the bad new sooner than later. Furthermore, your banker does not want surprises. If you are having issues with your business, then discuss these early on with your banker. If you’re getting close to the limitations of your covenants, then let your banker know. In addition, if you see a change coming in your industry, then let your banker know early on. Be sure to give your banker the good news also. If you are planning on changes to Sr. Management, then mention these to your banker.

The banking world changes based on the economy, regulations, and markets. We remember 2008 when new credit at banking institutions basically shut down. Before that, it was fairly easy to get credit. And loan requirements were not as cumbersome – which is not always good. But the crisis caused a change in behavior at banks – some of it self implemented and some implemented by regulators.

In today’s market, money is still relatively cheap. There is an abundance of liquidity in the markets. So banks do want to loan money, but you must meet some basic guidelines.

What Your Banker Wants You To KnowWhat Commercial Banks Want

In order to loan you money, commercial banks basically want just a few things:

  1. They want to have collateral that secures their loan
  2. They want to know you have the cash flow to payback their loan
  3. They want to understand your business and they want to know what the funds will be used for
  4. They want to understand how much they will make $ on their loan to you

Different Types of Lenders

There are different types of lenders, including the following:

The cost of that capital goes from cheapest to most expensive lender on the list above. The structure of the debt also goes from easiest to most complex structure in the list above. Some want collateral (security), and some do not.

Looking for more capital? There may be cash lying around your business. Learn the 25 Ways to Improve Cash Flow today.

Keep Your Eye on Your Debt Covenants

Most likely, if you have commercial debt, then you may have some debt covenants stated in your loan agreement. Covenants are the requirements you as the Borrower must maintain to be in good standing with your loan agreement.

Oftentimes, the bank and banker find out something is wrong when you turn in your financials and/or bank compliance certificate. They find that one of the covenants is out of whack. You may have a debt/EBITDA covenant ratio as part of your covenants. This is a common requirement. Do not wait for you to “bust your covenants” before you reach out to your banker. Monitor your covenants closely. If you see drivers in your business that may create a problem with your covenants, then reach out to your banker.

Renegotiate Covenants

Believe it or not, I have been in situations where the loan agreement is already a few years old. The company has become much more financially healthy, and I went back to renegotiate certain covenants to ease the reporting burden. The bank was very open to modifying some covenants. Usually, you have to be in good standing and have a good historical track record to modify or request to modify covenants. But do not be shy. Simply ask. The worst that can happen is your banker says, “no”.

Most bankers in today’s market do really care about the relationship, even at the biggest banks. Your banker does want to see you succeed. If you are living through troublesome times, then your banker does want to see you get financially healthy. But you need to communicate with your banker. The worst thing you could do is hide something from your banker or try to sweep something “under the rug”. That will eventually come, out and you will have burned a bridge with your banker. After you hide something, or if you do not disclose something, your banker will always carry that doubt in the back of his mind. And they may not be there for you when you really need to negotiate that debt covenant.

Are there other areas in your company that you can focus on to improve cash flow (outside of bank loans)? We have put together the 25 Ways to Improve Cash Flow whitepaper to make a big impact today on your cash flow.

 

What Your Banker Wants You To Know
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

What Your Banker Wants You To Know

1

5 Cs of Credit – How to Be More Credit Worthy

Are you credit worthy? Right now, is your credit good enough for a lender to give you a loan or line of credit today? If your answer is no or if your not sure of your answer, take a look at the 5 Cs of Credit. This 5-point checklist allows loan officers to easily determine if you are going to be good for their banking business. Although, banks don’t strictly rely on only the 5 Cs of Credit, it’s good to know where they start.

But first, what are the 5 Cs of Credit?

5 Cs of Credit

The 5 Cs of Credit include cash flow, collateral, capital, character, and conditions.

5 cs of creditCash Flow

The bank need to know that your company can generate (and has generated) enough cash flow to pay off the debt. To increase your chances of getting approved for a loan, display how you have paid off debt before, had consistent cash flow, and plan to pay off debt in the future. Remember, cash is king. Because of that, this is one of the most important Cs.

If you need to improve your cash flow, download our free 25 Ways to Improve Cash flow whitepaper. Get approved for that loan!

Collateral

Unfortunately, some companies fail. Regardless of whether the company fails or not, the bank wants to make sure that it can be paid. The bank looks for sufficient collateral to cover the amount of the loan as the secondary source of repayment. This C allows the bank to cover all their bases because at the end of the day, they just want to be paid.

The bank wants to make sure it is protected if you cannot repay the loan. As a result, the bank will look into your savings, investments, and/or property.

5 cs of credit

Capital

Capital is a huge sign of commitment. One of the reasons why the bank looks at capital to approve a loan is to confirm that the company can weather any storm and ensure that the owner will not just walk out any day. The bank needs to know that there is a significant commitment, that being an investment, from the owners of the company.

Character

One of the suggestions we give to clients when developing a banking relationship is to take their banker out to lunch. This provides an opportunity for the banker to assess your character. What are they looking for? Integrity, honesty, respect, and other virtues reflect a good business person who will stick with their commitments in the good times and the bad. Sound character is critical in business. The banks want to feel safe when doing business with you.

Indicators of character include credit history and stability. The biggest question asked is, “will you be able to repay the debt?”

Conditions

With any business, there are external factors that could impact the company’s success. Therefore, the bank looks for conditions surrounding your business that may or may not pose a significant risk to your ability to succeed (and pay off your loan). If there is high risk, the banks will be more cautious when approaching you. But if the risks are small and do not impact any of the 5 Cs of Credit, then the bank is more willing to offer a loan.

Ask yourself: can you repay the debt?

Why do banks follow the 5 Cs of Credit?

In short, banks follow the 5 Cs of Credit to mitigate any risk related to loaning to a company. The risk a bank incurs from lending money to companies can be managed by assessing different areas of credit. Although not every bank uses this list, it’s safe to assume that when approaching a bank, you need to address each of these factors.

Relationships

Business deals with people; therefore, it is critical for the management (especially the owner/CEO/CFO) to have a good relationship with their banker. Imagine a random person coming into your office to ask for a $350,000 loan. Because you have no relationship with them, you don’t know how honest they are, if they have integrity, how willing they are to pay back the loan, how they do business, etc. Because there are a lot of unknowns, the risk increases dramatically.

Trust between a bank and a company is developed when you have proven that you are able to pay off your loans, have long-lasting relationships with customers, vendors, suppliers, etc., and alert the bank if your projections are a little off.

5 cs of creditWhat Lenders Look For

Lenders look to reduce their risk. They are willing to provide loans that may not have the highest return over risky loans with high returns. Areas of risk include the amount of credit used, the number of recent applications for loans, how much the company makes, and available collateral.

To start the process of applying for a loan, address areas that need to be fixed before the application, explain any red flags that your banker might raise, and prove you are credit worthy.

How to be More Credit Worthy

Creditworthiness is a valuation method banks use to measure their customers, your company. Although there may be slight differences between personal and business credit scores, it is a good start to improve your personal credit score. If you follow the same guidelines in your business, the company’s creditworthiness will increase.

Be more credit worthy by:

  • Paying bills on time
  • Pay more than just the minimum amount required
  • Manage credit card balances
  • Limit or manage the usage of debt

In addition to addressing the factors that directly impact your credit score, take a look at the 5 Cs of Credit. If you find yourself lacking in any one of those areas, make it a goal to increase your creditworthiness in that area over the next quarter. If you have decided to start tackling the first “C” – cash flow – download the free 25 Ways to Improve Cash Flow whitepaper. Make a big impact today with this checklist.

How to Be More Credit Worthy, 5 cs of credit

Strategic CFO Lab Member Extra

Access your Cash Flow Tuneup Execution Plan in SCFO Lab. This tool enables you to quantify the cash unlocked in your company.

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

Click here to learn more about SCFO Labs

How to Be More Credit Worthy, 5 cs of credit

0

What Lenders Look At?

See Also:
Relationship With Your Lender
What Does a Lender Want to Know
Don’t Tell Your Lender Everything
Due Diligence on Lenders
Finding the Right Lender

What Lenders Look At?

I recently spoke to students at the University of Houston in the Wolff Center for Entrepreneurship on the topic of Dealing with Lenders. During the question and answer portion of the program, I was asked by a student, what lenders look at when they are deciding whether or not to approve a loan.

I answered the question by saying all lenders start with looking at the C’s of credit. There are normally five Cs of credit which I will define in a minute. But, the really important issue in getting your transaction approved rests upon your ability to present your case in satisfying each of the C’s.


Download The 25 Ways to Improve Cash Flow


5 Cs of Credit

Depending upon your lender, the weight assigned to each “C” may vary, so you must understand the order of importance to the specific lender you are dealing with.

Character

The first C is Character. Normally borrowers don’t consider this but, lenders do. Lenders look at such things as your willingness to pay obligations, morality, and integrity. Lenders determine the borrower’s business character based on the historical information. To form an opinion on character, lenders will review the borrowers past success, payment history, and intangibles such as personal credit, family background and employment records.

Capacity

Another C is the borrower’s Capacity to pay. The lender normally looks to the business and determines if the business has a history of successful operations. The lender will determine if the business has paid their debts when they were due and shown a proven ability to generate cash flow. If you are trying to fund a start up, you must show prior business experience relating to the operation of the business you are trying to start. You must provide evidence of the capability of operating successfully and paying your bills.

Capital

Next, lenders look at another C Capital. Capital is the equity or net worth of a company. Capital signifies the company’s financial strength as a credit risk. The more capital a company has, the smaller the credit risk. Your company needs a history showing increasing sales, profits and net worth. Additionally, your company needs favorable trends in your operations, such as, constant or increasing gross profit margins.

Conditions

Another of the C’s is Conditions. Lenders will analyze how current and expected economic situations may affect your business. Such items might include past and current political history, and business cycles for you and who you sell to. Normally, the lenders like industries that are in periods of dynamic growth.

Collateral

The final C is Collateral. Lenders will determine the company’s ability to access and provide additional resources such as, equity or other assets, to use for repayment if the company’s capacity or character fails.

By addressing these C’s in your business plan and on your loan application you make the lender’s job faster and easier. Therefore, understanding and selling your C’s will improve your chances of getting the lender to approve your request.

For more tips on how to improve cash flow, click here to access our 25 Ways to Improve Cash Flow whitepaper.

what lenders look at
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

what lenders look at

0

7 C’s of Banking

See Also:
5 Cs of Credit
Line of Credit
Credit Rating Agencies
How Important is Personal Credit in Negotiating a Commercial Loan?
Improve Your Credit Score

7 C’s of Banking

Every knows the 5 C’s of Banking. But what are the 7 C’s of Banking? Recently, I spoke to students at the University of Houston in the Wolff Center for Entrepreneurship on the topic of Dealing with Lenders. During the question and answer portion of the program, a student asked me “What do lenders really look at when they are deciding whether or not to approve a loan?”

7 C’s of Credit: Condition

Is there a logical need for the funds? Does it make business sense? Are the funds to be used to grow an existing and proven business product or service business or to be used for an unproven one?

7 C’s of Credit: Collateral

Is the proposed collateral sufficient? What type of value does it have? Is there a secondary market for it? The lender wants to know, in the event of a default, that it will be likely to recoup a significant portion of the amount lent.

7 C’s of Credit: Credit

For smaller enterprises, the personal credit score of the individual owner(s) will be reviewed. As with personal loans, such as an auto or mortgage loan, the bank is looking for evidence of a history of you paying your lenders on time. For larger companies, the bank will consult Dun & Bradstreet reports for evidence of the timely payment of vendors and other creditors.

7 C’s of Credit: Character

What do those who have done business with the prospective borrower have to say about its business practices? A bank will typically ask the applicant for a list of references, such as three customers and three vendors to contact.

7 C’s of Credit: Capacity

Does the borrower have the wherewithal to pay the debt service? Is it generating enough free cash flow to reasonably assure timely interest payments and ultimately the repayment of the principal balance?

Due to the expanding levels of transnational business and cross-border lending over the last few decades, you need to discuss the two new C’s.

7 C’s of Credit: Currency

What is the recent history and outlook of the primary currency in which the company will conduct its operations? Does the currency exhibit a history or likelihood of losing its value? The more stable the currency, the more attractive the loan request will be to a lender.

7 C’s of Credit: Country

Does the borrower conduct a significant portion of its operations in a country with a history of political instability? Is there the possibility of an expropriation of the borrower’s assets due to a change in the country’s government? Is the country’s current political and legal system hostile to the interests of foreign countries? There are two factors that would make the bank more likely to be willing to make the loan, including the following:

  • The more established the country’s government is
  • The more a legal system has demonstrated a reverence for bother property rights and the rights of creditors

Download our three best tools that will take your business to the next level!

bank lending cycle

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

7 C's of banking

1

Secured Claim

See Also:
Pledged Collateral
Collateralized Debt Obligations
Debt Ratio Analysis
Debt Service Coverage Ratio (DSCR)
Convertible Debt Instrument
Asset Based Financing

Secured Claim Definition

The secured claim definition is debt backed by collateral. It can refer to loans, mortgages, bonds, and other financial debt instruments.

As stipulated in the debt contract, the debtor backs the debt with assets that the creditor may claim in the event of default. In a secured claim contract, if the debtor defaults, or is unable to payback the debt, the creditor can take ownership of the collateral and sell it to pay off what the debtor owes. For example, if a consumer defaults on a mortgage, the bank can claim the house and sell it to pay off the consumer’s debt. In the event of default, the secured claim is worth only as much as the collateral that backs it.

In contrast, unsecured claims are debt contracts or instruments not backed by collateral. Secured claims are considered less risky. In addition, these contracts or instruments offer lower yields. In comparison, unsecured claims are more risky. These contracts or instruments offer higher yields to compensate the lender (or investor) for the higher risk.

secured claim

0

Pledged Collateral

See Also:
What are the 7 Cs of banking
How to Manage Your Banking Relationship
Is It Time To Find A New Bank
Collateralized Debt Obligations
External Sources of Cash

Pledged Collateral Definition

Pledged collateral refers to assets that are used to secure a loan. The borrower pledges assets or property to the lender to guarantee or secure the loan. Pledging assets, also referred to as hypothecation, does not transfer ownership of the property to the creditor, but gives the creditor a non-possessory interest in the property. This means that the borrower still retains the ownership of the property, but the lender has a claim against it.

In the event of default, the collateral for a loan may be liquidated and sold off by the creditor in order to pay for the unsettled debt. In this case, the borrower loses possession of the collateral properties. All proceeds from the sale of these collateral properties go to pay off the debtors obligations.

Collateral Items

In business, a company may pledge various types of property as collateral. A borrower may pledge physical assets, such as equipment, machinery, real estate, buildings, or inventory, or it may pledge trade receivables, such as the value of the company’s accounts receivable, which represents money owed to the company.

Margin Collateral

For investments, a dealer or broker may require an investor to pledge a certain amount of capital as collateral for the investments made with money borrowed from the broker or dealer. The margin collateral must equal a specified proportion of the value of the investments. This occurs when an investor wants to short a stock, which typically involves borrowing. Often, the margin collateral must be at least 50% of the value of the investments, although it could also be a different percentage, depending on the circumstances.

If the value of the investments decreases so much that the value of the margin collateral becomes less than 50% (or some other specified percentage) of the value of the borrowed investments, the investor may receive a margin call from the dealer or broker. A margin call is when the dealer or broker calls the investor to tell him that the margin collateral has fallen below the minimum threshold, and that the investor must post more margin collateral to regain the required threshold.

Hypothecation

Hypothecation is another term for pledging collateral to secure or guarantee a loan or other debt obligation. The borrower, or hypothecator, pledges, or hypothecates, property to the lender. The creditor then has a non-possessory claim against the hypothecated assets. In the event of default, the creditor would take control of the hypothecated assets. Then, they would liquidate them to repay the borrowers debt.

Pledged Collateral

3

LEARN THE ART OF THE CFO