To increase the likelihood of obtaining a loan for your business, or to increase the availability of credit if a loan is already in place, it is important to understand the perspective of the lender.
Lenders often start in their evaluations process with the three C's:
• Character of management
• Cash flow of the business
• Collateral
If any of the C's are lacking, the loan will either not be provided or will have obstacles to overcome.
It was not that long ago that with good character of management, collateral shortfalls could be overlooked. Even cash-flow shortfalls were tolerated in the early months of a lending relationship as businesses grew out of losses.
So much has changed in the past two years that banks are now reaching deeper, looking further beyond the three Cs to seek much stronger guarantors and secondary collateral (e.g., the personal assets of the company owners/management).
We often hear business owners or management say, “I need a banker who will be my partner.” While having a banker that understands your business is extremely important, a bank is not a partner from the perspective of providing equity or high-risk debt financing.
Banks are in the business of lending funds that will be repaid with interest and it is important to illustrate to the lender how those borrowings will be repaid. The borrowing and repayment plan should forecast the expected financial statements of the company and illustrates how and when the borrowed funds are repaid out of the operations of the company.
This plan is important to the lender but is also paramount for company management, as they need to be comfortable with the type and structure of the loan facility to determine that it will be a fit for the business.
Also, as many businesses have marketing plans and strategic plans for growth, so too do businesses need a banking plan. To make a company more bankable, consideration needs to be given to how interim and year-end profits and equity will appear to a lender.
If all profits are distributed out, the equity of the company may become too depleted from a banking perspective, making the approval of the loan more challenging.
By looking at the company's financial statements from the perspective of a lender, a business can increase its likelihood of obtaining the financing it desires.
Mark Stepka, CPA, CVA can be reached at (760) 448-8193.
Lenders often start in their evaluations process with the three C's:
• Character of management
• Cash flow of the business
• Collateral
If any of the C's are lacking, the loan will either not be provided or will have obstacles to overcome.
It was not that long ago that with good character of management, collateral shortfalls could be overlooked. Even cash-flow shortfalls were tolerated in the early months of a lending relationship as businesses grew out of losses.
So much has changed in the past two years that banks are now reaching deeper, looking further beyond the three Cs to seek much stronger guarantors and secondary collateral (e.g., the personal assets of the company owners/management).
We often hear business owners or management say, “I need a banker who will be my partner.” While having a banker that understands your business is extremely important, a bank is not a partner from the perspective of providing equity or high-risk debt financing.
Banks are in the business of lending funds that will be repaid with interest and it is important to illustrate to the lender how those borrowings will be repaid. The borrowing and repayment plan should forecast the expected financial statements of the company and illustrates how and when the borrowed funds are repaid out of the operations of the company.
This plan is important to the lender but is also paramount for company management, as they need to be comfortable with the type and structure of the loan facility to determine that it will be a fit for the business.
Also, as many businesses have marketing plans and strategic plans for growth, so too do businesses need a banking plan. To make a company more bankable, consideration needs to be given to how interim and year-end profits and equity will appear to a lender.
If all profits are distributed out, the equity of the company may become too depleted from a banking perspective, making the approval of the loan more challenging.
By looking at the company's financial statements from the perspective of a lender, a business can increase its likelihood of obtaining the financing it desires.
Mark Stepka, CPA, CVA can be reached at (760) 448-8193.