Whether it's a lender trying to sound optimistic about the outcome of a loan, or a prospective borrower making a case for why his loan should be granted, we've heard a common refrain over the years:
“Don’t worry, there’s lots of collateral.”
Unfortunately, these are frequently famous last words.
Whether you're buying a house, car or a suitcase, there's one factor you're sure to take into account: capacity. When it comes to qualifying for a loan, bankers are no different. Capacity (or cash flow) is the second of the Five C's of Lending (learn about the first C here) and it is something a lender will review and analyze to determine if a business or individual has the ability to repay the loan in a reasonable and timely manner. In other words, they ask how much debt could your business could “hold” and still generate sufficient profit and cash flow to operate comfortably.
Back in 2011, our CEO, Ed Lette, wrote about the Five C’s of Lending. Given how important these factors are in the lending process, I thought it would be helpful to look at each one of these areas a little more closely.
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Taking these five steps when granting trade credit to your customers will minimize credit risk and improve your overall accounts receivable collections efforts.
Your credit application doesn’t need to be complicated, but it should help you gather information necessary to make a good credit decision. The application should indicate the legal name of the business and ownership; provide banking information, and information on trade credit grantors. Business often provide a preprinted “bank and trade references" list to you, but the importance of your application is that the customer, by signing it, grants you permission to contact their bank and trade creditors for payment history.
Weve written several articles about the importance of regular financial benchmarking (both internal and external) for the health of a business. Of all the financial benchmark ratios a business owner could use to measure the financial health of their business, liquidity ratios may be the most important.
As a business executive, cash management is a vital skill. Cash is one of the top five financial variables by which business are evaluated for potential investment, commercial loan approval and the sale of the business. It is the fuel that drives growth, and managing cash incorrectly can have a negative impact on the success of your business.
You would be surprised how many construction companies set aggressive goals for landing new projects, achieve their goals by winning many of those new projects, only to find that they grew themselves right into a cash crisis. They say "Let's go out and win some new and bigger projects. Everything will get better if we just increase the number and size of the projects we win."
Verne Harnish, in his book Scaling Up, says it beautifully: “Growth sucks cash – the first law of entrepreneurial gravity.”
The reality of business is that growth, especially rapid growth, is almost always a net user of cash. This is especially true in the early stages of a new project.
If you're a small business owner, you're likely aware of various risks related to your line of work. One that you may not be familiar with is a high concentration of sales or credit. This threat arises when a small number of customers represent a large percentage of your annual sales or accounts receivable.
Most business owners know how to calculate fixed costs—like rent and equipment—and variable costs— such as wages, utilities, materials, etc.— related to providing goods and services. But there is another kind of cost to consider when making business decisions: lost opportunity cost. While lost opportunity costs can sometimes include intangible factors that are harder to measure, that does not mean they are not real. Savvy business owners understand how to identify and measure them, and how to respond when they arise.