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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.

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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
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What Your Banker Wants You To Know


Venture Capitalists Definition

See Also:
Why Venture Capital
The Dilemma of Financing a Start-up Company
Angel Investor
What is a Term Sheet
Working Capital

Venture Capitalists Definition

A venture capitalist is an investor who invests in risky startup businesses. The venture capital investor provides funding to an entrepreneur who may not have access to substantial bank loans or other sources of capital. Venture capitalists also invest in small companies that are expanding. They also invest in private companies planning to go public. They will often want to participate in the decision-making of the business in which they invest.

Venture Capital Investor

The venture capital investor may be one of the following:

Consider venture capital investing to be high risk and high yield. Additionally, the recipients of venture capital loans are typically small startup companies with great growth potential.

Venture Capital Funding

Venture capital funding is a source of private equity for startups, small expanding companies, and private companies that are planning to go public.

The startup business is usually at the earliest stages of development. In addition, it may be little more than an idea and a business plan. Because the startup enterprise has no record of success, the venture capital investment is considered risky. In return for the venture capital funding, the venture capitalist typically wants high returns on the loan as well as a stake in the equity of the startup company.

If the recipient is a small expanding company or a private company planning to go public, then they may not have access to substantial funding from commercial bank loans or capital markets. In any case, the venture capitalist can be a good source of funding when the business has few or no other alternatives.

Venture Capitalist Funds

Venture capital funds are pools of capital from various investors, such as wealthy individuals or investment banks. They are managed and invested in various startups or other risky enterprises. The funds seek investment opportunities with great growth potential. Consider the venture capital fund a high risk investment. As a result, investors expect to be compensated for the high risk with high yields. If you want to remove any potential destroyers risking your investment, then download the Top 10 Destroyers of Value whitepaper.

Venture Capitalist Funds, Venture Capital Investor, venture capitalists definition

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Access your Exit Strategy Execution Plan in SCFO Lab. This tool enables you to maximize potential value before you exit.

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Venture Capitalist Funds, Venture Capital Investor, venture capitalists definition


Venture Capital

See Also:
Every Business Has A Funding Source, Few Have A Lender
Don’t Tell Your Lender Everything
Due Diligence on Lenders
The Relationship With Your Lender
What Does A Lender Want To Know?

Venture Capital Definition

The Venture Capital definition is a funding source for start-up businesses or turnaround businesses. There is typically more risk associated with these types of investments, but high returns as well.

Venture Capital Meaning

The Venture Capital meaning is when a lender, usually a private equity group or high net worth individuals, provides financing for a new business, a business that needs cash for growth, or a company attempting to make a turnaround. Associated with these different business needs are the different stages of venture capital.

Seeding Stage

The first stage for the companies that are just starting up is known as the seeding stage.

Growth Stage

The next stage is the growth stage for those businesses that are not quite ready for an Initial Public Offering (IPO), but are in need of some financing to get them to that point. Often times venture capital firms provide the funding for these companies knowing that they are high risk. However, these lenders usually earn a high return as these companies go public. This is because the lenders receive large compensation in the form of equity in the company or a large cash settlement. If a company is in a turnaround stage this is the highest risk of venture capital.

Exit Stage

The exit strategy in this stage often go for a much higher cash option or equity stake than even the first and second stages of company development. This type of capital is often necessary because the companies in need of this financing are not large enough to obtain the capital from the markets in the quantity needed.

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venture capital, Venture Capital Definition, Venture Capital Meaning

Strategic CFO Lab Member Extra

Access your Exit Strategy Execution Plan in SCFO Lab. This tool enables you to maximize potential value before you exit.

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

Click here to learn more about SCFO Labs

venture capital, Venture Capital Definition, Venture Capital Meaning



Term Deposit

See Also:
Loan Term
5 C’s of Credit (5 C’s of Banking)
How to manage your banking relationship
Bank Charge
Financial Instruments

Term Deposit Definition

A term deposit, also referred to as a time deposit or a certificate of deposit (CD), is an amount of money invested into a financial institution for a set amount of time or term period. Interest and withdrawal terms are sometimes negotiable because there are at times penalties with early withdrawals.

Term Deposits Explained

Term deposits are often short-term investments individuals make into a bank or other financial institution. Because of there short-term nature, consider time deposits one of the safest investments in the marketplace. Another advantage for an investor is the ability to invest at a higher interest rate than a normal savings account.

Term deposit disadvantages include the fact that a company or individual cannot touch or withdraw the fixed amount until the term is up without suffering a penalty. Smaller denominations under $100,000 usually contain contracts that are pre-established, with a certain amount of penalties if the deposit is withdrawn, interest rates are non-negotiable, and the amount of time in which the individual or company wishes to invest. Larger denominations or deposits above $100,000 are often negotiable. This means that the company or individual will negotiate the penalties for withdrawal, rate at which the money will be invested and the term or time period that the investor wants to pursue in his/her/its investment strategy.

Term Deposit Example

Company X has just received $1 million cash in its receivables from a customer. Company X also owes Company Y $800,000 in accounts payable for supplies that X used to manufacture its products. However, the payables are not due for another 3 months to Y. Therefore X has decided to put the $800,000 aside into a certificate of deposit (CD) for 3 months at a rate 5% which is higher than the savings account rate of 3.5%. Thus by the end of the 3 months X will have a profit of $10,000 (3/12 * 5% * $800,000). By holding the cash owed to Y and investing in a term deposit X has earned an extra $10,000.

term deposit


Top Down Approach

See Also:
Bottom Up Approach
How to Prepare an Investor Package
Common Stock Definition
Debt Service Coverage Ratio (DSCR)
Consumer Price Index (CPI)
Prepare an Investor Package

Top Down Approach Definition

A top down approach definition is the act of seeking out securities by first looking at global economics, industry, and then individual companies. Finally, an investor finds an excellent security to invest in.

Top Down Approach Meaning

There are several different factors that are involved in a top down approach meaning. The top down approach analysis tries to incorporate all of these factors to try and find a best fit on a security that an investor is seeking.

Top Down Approach Factors

Those factors include the following:

1. Look at the Global Economy

A top down investor will first look at the global economy as a whole when conducting a top down approach. Different global economies affect a firm’s pricing and competition. Currency exchanges can have a large effect on this competition and should also be considered. If a firm is experiencing a lot of difficulty in competing in a country it conducts a lot of business in it may not be the best fit for an investor to buy the security.

2. Look at the Local Government and Economic Environment

The next step in the top down approach model is for an investor to look at the local government and economic environment of the best fit country. The best indicators to test the surface are by looking at the gross domestic product (GDP), unemployment rates, inflation, interest rates, and the budget deficit of the local government.

3. Indicate a Specific Industry

All of the factors above indicate a specific industry in which the investor might need to choose based upon the type of investment needed. Some industries perform better in certain economic environments than others. Based upon the conditions in steps one and two, you can choose the right industry. Industries might vary in their growth, volatility, and life cycles.

4. Choose a Specific Company

Finally, the last step is for an investor to choose a specific company within the industry. Investors want to pick a company considered in excellent condition. Perform this by doing a thorough financial analysis. In addition, gain opinions of several analysts who are familiar with the industry.

Top Down Approach Example

For example, the world economy is currently in a recession. However, Dwight has some money sitting in a bank account that he would like to invest in order to earn some sort of return. Dwight decides that he is going to follow a top down approach to investing to decide what security he should invest in and add to his portfolio.

Dwight first decides that he would like to invest domestically in the United States. This is because he believes the U.S. will bounce back sooner than most other countries. He then decides that he would like to invest in the oil and gas industry; it has historically been known to be a relatively recession proof industry and less volatile. After observing several different companies Dwight decides that he wants to invest in Chevco Inc.. Chevco Inc. has historically performed better than its peers even in recessions.

Note that using this approach does not always account for the desired return or deviation that an investor may want to take on or receive.

top down approach, Top Down Approach Definition, Top Down Approach Meaning


Synthetic Stock

Synthetic Stock Definition

Synthetic stock is created when a holder of a call and put option simulates the stock when that holder buys and sells the options accordingly. Without participating in the market the holder can stand to make a gain. Then, they can invest in the stock as long as the expiration has not occurred for the options.

Synthetic Stock Explained

Synthetic Stock can be created in various different ways but the most common ways involve having a long or short stance on a put option, and the same for a call option. A synthetic long stock is where an investor will take a long position on the call option while taking a short position on the put option. The other stance is known as a synthetic short stock. That involves the investor taking a long position on the put option and a short stance on the call option.

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synthetic stock

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

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synthetic stock

See Also:
Call Option
Put Option
Intrinsic Value – Stock Options
Stock Options Basics
Common Stock Definition


Securities and Exchange Commission (SEC)

See Also:
New York Stock Exchange (NYSE)
Generally Accepted Accounting Principles (GAAP)
American Institute of Certified Public Accountants – AICPA
Financial Accounting Standards Board (FASB)
Full Disclosure Principle
Corporate Veil
Investment Banks
Treasury Stock
Accounting Fraud Targeted

Securities and Exchange Commission (SEC) Definition

The Securities and Exchange Commission (SEC) is a U.S. government agency that is responsible for protecting the well being of investors. The SEC performs this function by regulating securities whether it is public company stocks, bonds, or any other security issued into the U.S. market.

Securities and Exchange Commission (SEC) Meaning

The Securities and Exchange Commission was created in 1934 to try and rid the market of unfair or corrupt practices. This meant that all publicly traded companies had to present audited financial statements, and meet all other requirements that the SEC established. The idea is to protect the everyday investor who does not have extensive knowledge of markets or securities. Five commissioners operate the SEC, and the President of the United States appoints them. Furthermore, a requirement is that there can only be three members at the most from a single political party. The President also appoints one of these members to be a chairman; however, no one is able to fire them once the President appoints these commissioners. This allows the commissioners to operate in the best interest of the people without worrying about losing his/her job.

Four Divisions of SEC

The SEC has four main divisions Corporation Finance, Trading and Markets, Investment Management, and Enforcement. Each of these has a separate responsibility towards certain securities and how they are offered into the market. Overall, the Securities and Exchange Commission duties have been performed up to par. However, there have been times in which fraud or insider trading has been routed out meaning that the SEC must amend what it is doing to try and avoid the same problems in the future and protect investors.

If you want to overcome obstacles and prepare how your company is going to react to external factors, then download your free External Analysis whitepaper.

securities and exchange commission (sec)

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.

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