Tag Archives | lenders

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.

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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

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Time To Find A New Lender?

See Also:
External Sources of Cash
Other People’s Money
Due Diligence on Lenders
Don’t Tell Your Lender Everything
Finding The Right Lender

Is It Time To Find A New Lender?

I was meeting with a business adviser last week named John and he asked me “When do you think it is in the best interest for a company to find a new lender?”

Determine Location On Lender’s Food Chain

I told John the first thing a company must determine is where they are located on the food chain of the lender. It may be hard to believe, but some lenders may not want their business. If the company does not realize the lender’s feelings and chooses to stay, the lender will take their business (money) until they realize they are being over charged and leave.

John then said “What you are saying is the lenders may not value some business.” I said that is right, and as you know, companies normally deal with a lender that makes the process faster and or easier. I then asked John “How many of your clients have done any due diligences to determine if the lender is going to help them meet their personal or business goals?” He looked a little funny and said “None that I know of.”

I said that is normally the case. When your client is talking to the lender, they need to determine if the lender is really listening. In some, if not in most situations, the lender is listening, but not about your needs. The lender may be listening for selling signals to seize upon the opportunity to offer you some product or service you really don’t need or want.

Fee Income

Lenders have diversified their services and are very interested in fee income. Fee income is defined as the income a lender receives without taking any risk. Checking account maintenance fees, loan closing fees, ATM fees, etc., meet this definition. Your client’s business may need some, if not all of the services offered, but is the lender asking questions about the company’s needs, or just selling their services?

Your clients should realize that lenders do not have their best interest in mind. Lenders are in business to make money, just like your clients. I have had lenders tell me they do not want to offer solutions that would reduce costs to their customers because they would loose their fee income and reduce their profits.

Your clients must remember to make sure the lender is listening and understanding their needs. Additionally, your clients should understand, the best lender may not be the fastest and easiest to deal with.

find a new lender

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Improve Your Credit Score

See Also:
5 Cs of Credit
What are the 7 Cs of banking
Line of Credit
Credit Rating Agencies
How Important is Personal Credit in Negotiating a Commercial Loan?
Dilemma of Financing a Start Up Company

Improve Your Credit Score

In another article, I told you about Chris’ dilemma with his poor credit score in trying to get traditional bank financing. Had some inquiries from that article asking what a credit score is and what steps can be taken to improve a credit score. This may not seem related to cash flow, but if you can not borrow money for your business because of your personal credit, then your business will not survive.

This once secret process of credit scoring is now made available to us and that makes it easier to improve your credit. For those of you that have not been exposed to credit scores, they are three digit numbers that are used by lenders when evaluating your creditworthiness. Other companies, such as, insurance companies, employers, and landlords use these scores in evaluating credit applications.

Credit Scoring

There are three credit scoring companies: Equifax, Experian, and TransUnion. The information reported to them by your creditors goes into the calculation of your score. The scores these companies provide to interested parties range from 300 to 850. Understand, the higher the score the better credit risk you are. To give you an idea how Americans rate, only about 11% rank above 800; 29% rank between 750 and 799; 44% rank between 620 and 749; and 16% rank below 620. Below 620 indicates you have a serious, negative credit history, and obtaining financing with reasonable terms will be difficult.

Now that you have decided to review and or improve your credit score, how do you do that? The first step is to obtain your credit reports from the three credit bureaus. One way to obtain these reports is to purchase them from www.myfico.com. When you receive your reports, instruct the bureaus to remove any incorrect information. Once you correct the information, start the process of improving your score.

3 Ways to Improve Your Credit Score:

1. You should pay your bills on time. Payment history is the most important factor in determining your credit score. This accounts for 35% of your total score. Even just making those minimum payments will maximize this area. Understand delinquent payments will destroy your credit score. Missing just one payment can cost you up to 100 points.

2. You should pay down your debts and charge less. Lenders consider and like to see a large difference between the amounts of debt reported on your credit cards and your total credit limits. The larger the gap between these numbers the higher your credit score.

3. You should not close old, paid off accounts. Based upon the calculation of your credit score, closing accounts can never help your score, but often times it will hurt your score.

I know that dealing with your credit score is not something you are looking forward to. However, if you need to improve your cash flow, you must improve your credit scores. Access our Personal Financial Statement template to get started on seeing credit score improvement opportunities.

improve your credit score, credit scoring

improve your credit score, credit scoring

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External Sources of Cash

See Also:
Angel Investor
Categories of Banks
Commercial Paper
Common Stock
Convertible Debt Instrument
Venture Capital

External Sources of Cash

In another article, I told you about Sue and generating cash from sources within her business. I will not detail her entire story at this time, but will tell you that we were successful in obtaining external cash allowing her to grow the business with the piece of mind of a constant and predictable cash flow.

We need to make sure we are all talking about the same thing when we hear or see the phrase “external sources of cash”. So, today I am going to define external sources of cash, and in the future, I will share situations where the different types are best utilized.

There are two sources of external sources cash for businesses: lenders and equity investors. I will begin with the least costly.


Download The 25 Ways to Improve Cash Flow


1st Source of External Cash: Lenders

Always remember that borrowing, no matter what the sources, will be less costly than equity. There are two classifications of lenders to discuss. However, within the classifications there are various sub categories. First and by far the least costly is traditional bank financing. What I am talking about here is when the bank takes all of the financial risk on your loan. Examples of these loans would be traditional lines of credit, loans for equipment, and building loans. Additionally, banks offer other products when they do not take all the risk and these products are more costly. Examples of these products are Small Business Administration (SBA) loans, equipment leasing, and factoring. Later in the series we will discuss the various differences in the lending philosophy of banks and different types of banks such as state vs. national, and community vs. multi state.

The second types of lenders are what I will call alternative lenders. Probably a term you may not be familiar with, but include such companies as asset based lenders, accounts receivable lenders, factoring companies and hard money lenders. These lenders take greater risk in their lending activities than banks. The reasons alternative lenders may be a better source than banks vary on a case by case basis. In future articles, each one of these will be discussed with examples and stories.

2nd Source of External Cash: Equity Investment

The second type of external cash for a business is equity investment. This by far is the most expensive cash or capital a business can acquire. You may be asking “why is this most expensive… I don’t have to pay it back”. Well, the answer is you are sharing part of your profits each year for the growth cash with your partner, and then upon the sale of the business, you share the return on equity with the partner.

Understanding the two different external sources of cash is critical because each or all may be needed in your business’s situation. For more tips on how to improve cash flow, click here to access our 25 Ways to Improve Cash Flow whitepaper.

External sources of cash

External sources of cash

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Due Diligence on Lenders

See Also:
Relationship with Your Lender
Finding the Right Lender
The Dilemma of Financing a Start-up Company
Every Business has a Funding Source, Few have a Lender
Angel Investor

Due Diligence on Lenders

I am sure all of you have applied for some type of a loan from some institution to be used for college, car, home or business. By the end of the process, you have given them applications and supporting documents that, in some cases, can weigh several pounds. When I am involved in a transaction with a client, I encourage them to do as much due diligence on my company, Summit Financial Resources, as we will do on them.

Example of Due Diligence on Lenders

For example, I was recently told by a business woman named Robin that all lenders are the same. A little concerned with her comment, I asked “Why do you feel that way?” She went on to tell me that banks are controlled by the government; therefore, all banks have the same rules, so all banks are the same. She continued by saying, “I just use the bank located nearest to my business.” I replied, “I agree that government does control banks. But, the government rules are guidelines, and the lenders create their lending policies and procedures from these rules. Therefore, each lenders’ policies and procedures are different, so you really should consider doing due diligence.”

The reason for the due diligence is to determine which lender understands your needs, and to make sure the lender’s policies and procedures will meet those needs. Also, I believe you should make certain the lender understands and values your business.

While looking at me as if she was not sure I was believable, she asked “What should I ask a lender? They have the money and I don’t want to make them mad by asking questions about them.” I replied by saying “Well, if that is the case, do you really want to get in a lending relationship with them?” Now appearing convinced, she wanted to know what she should be looking for in a lender and stated “All I know for sure is I need their money to have the cash to grow my business.”

Decide On The Lender

I told her, first of all, you need to decide what size of lender is appropriate and again, to make sure they meet your needs. In my opinion, location does not come into the mix. I categorize lenders into four groups, big market, middle market, small market and those in it for the money (I will share details of this conversation in next week).

Next, do you like the lender? Does he or she want to understand your needs and value your business? The lender is going to check out your credit and personal references, so ask the lender for some current or past customers. The lender’s customers can provide you with information on the lender’s strengths and weaknesses.

Another thing you want to talk about with the lender is their support staff. Make sure you are comfortable with the pre-funding and post funding support staff. By doing this you will know if the support will be via voice mail system, Internet, or a real person.

Robin did find the lender she liked with Summit. I visited with her later and she thanked me and shared the many successes her business has experienced. Then she told me she had shared her new found knowledge of due diligence with her business associates.

Don’t leave any value on the table! Download the Top 10 Destroyers of Value whitepaper.

due diligence on lenders

due diligence on lenders

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Categories of Banks

See Also:
Bankers’ Language is Financial Jargon
Finding the Right Lender
Funding Source Versus Lender
How to Manage Your Banking Relationship
Interest Rate
Is it Time to Find a New Bank?
Commercial Bank

Categories of Banks

In another article, I told you the story about Robin’s company needing to perform due diligence on her lender. I made a reference to categorizing lenders into four groups, big market, middle market, small market and those in it for the money. I said I would share details of that conversation this week.

Robin asked me to explain which banks are in each category. I started by telling her that what she was about to hear was developed by a banker who has over twenty five years of banking experience.

Big Market Lenders

Big market lenders are the giant banks we all know, such as, JP Morgan Chase, Wells Fargo, Bank of America, etc. They have every banking and personal financial service known to mankind. They are located on almost every street corner in Houston and in most cities in America. Very good at all retail and financial services and loans over 20 million dollars. They will do smaller loans but you must fit precisely into their lending policies. Personal customer service is limited. If you are approved, you will normally deal with the internet or 800 numbers at regional service centers.

Middle Market Lenders

Middle market lenders are the ones most of us have heard of which include Comerica, Wachovia, Compass, etc. These banks follow the bigger lenders in the retail and financial services they offer. They really like loans from 5 million to 20 million dollars, but will do smaller loans. The advantage they have over big banks is their lending policies are a little more flexible, but not very much. If dealing with a human loan officer is important to you, these lenders are more involved than the big market lenders. But again, you will normally deal with a regional service center or the internet.

Small Market Lenders

Small market lenders normally are made up of banks that cover a region or a single state. Lenders you will recognize in this category are Frost, Sterling, Amegy, Regions, etc. These banks will have most of the retail and financial services offered by the bigger banks. They are very good with loans ranging from 2 million to 10 million dollars. The major advantage they have over larger lenders is their lending policies are more flexible and they have a better appreciation of local industries. Another difference is they still maintain and provide personal customer service. However, this customer service may vary between branches because it depends on the people running the branch. They have the capability of internet banking and 800 numbers, but you normally still deal with your local lending officer.

Local Community Banks

The lenders that are in the business for the money are the local community banks. Normally these lenders have five or fewer branches and the bank president is an owner.

They do not have all the retail and financial service capabilities of the larger lenders. These banks are very good at loans between 250 thousand and 3 million dollars. Most have limited internet capabilities, but will normally provide the customers with very good personal service. In this category, if they want your business they will try to make their lending policies fit your needs. A possible disadvantage in this category is the bank president may have a history of starting the bank and building the bank to sell to the larger banks. Many times, the bank president has built and sold several previous banks, so be ready to change banks with the president.

Robin summarized this discussion by saying “So I should evaluate the needs and values I have within my business and deal within the category that fits.” I agreed. To learn more financial leadership skills, download the free 7 Habits of Highly Effective CFOs.

categories of banks

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