Being There: Site Visits Can Take You Beyond The Numbers
Aug 28,2018
Financial statements, strategic plans and other financial documents provide essential information about the health and prospects of your borrowers’ businesses. Why do you need anything further? While paperwork is essential to your due diligence, to really understand a company’s operations, you need to see what’s happening. Make it pleasant Borrowers may be unreceptive to unannounced visits, so frame your fall visit as a year-end planning meeting. To break the ice, offer to bring coffee and doughnuts to the office staff. Most borrowers will proudly show off their operations and view your visit as an opportunity to reinforce their lending relationship. Reticent borrowers could signal a red flag. You needn’t be an operations specialist to glean valuable insight from a site visit. Be ready to ask owners and employees lots of questions. And always keep your eyes and ears open for insight into the borrower’s current operations. For example, when visiting...
4 Hidden Costs Entrepreneurs Omit From Their Forecasts
Aug 28,2018
When entrepreneurs prepare financial forecasts for their business plans, they sometimes overlook costs that might have the potential to derail their business. That’s particularly problematic if a bank relies on a forecast during the initial underwriting process or on an ongoing basis to justify increases in a start-up borrower’s debt. Here are four costs entrepreneurs tend to leave out or miscalculate. 1.  Insurance In today’s litigious environment, businesses must protect themselves from a broad range of risks. Insurance can help small business owners mitigate the risk of running a business, but it’s important for them to get the right type and amount of coverage. Most insurance companies offer a general liability policy for small businesses that serves as a good starting point. It includes a suite of insurance products that are most relevant to small businesses. However, borrowers also should consider purchasing add-ons, such as flood, terrorism or cyberinsurance addendums,...
Head Off Concentration Risk at the Pass
Aug 28,2018
Every commercial borrower faces financial risks. It’s important to identify these risks so that you can find ways to minimize the negative effects they might have on business performance. Concentration risk is a financial risk that comes into play when a borrower relies too heavily on one, or one set of, suppliers or customers — making the business vulnerable if those “key” suppliers or customers fail. A rule of thumb for spotting concentration risk is if you notice that a borrower is buying 10% or more of materials from just one supplier, or selling 10% or more of its goods to one customer. Due diligence can help you stay on top of the financial health of borrowers and their supply chains. Product and geographic risk Borrowers may experience two main types of concentration risks: product and geographic. The most obvious type is product concentration risks. If a borrower’s most profitable...
What to Consider When Lending to a Franchisee
Aug 28,2018
Buying a franchise allows entrepreneurs to run a business with a tried-and-tested operating model. Yet franchise systems vary significantly both in their support of franchisees and their long-term viability. While some franchisors offer financing, first-time franchisees often find themselves in need of traditional bank loans. It’s not just new franchisees that need access to capital. Established ones frequently need funds to purchase new equipment, remodel their locations and meet short-term cash crunches. Here’s how to evaluate these types of loan applications. Learn about the franchise system While many profitable franchises exist, franchising doesn’t guarantee a path to riches. In fact, franchised businesses may fail for a variety of reasons. Take the time to learn about the franchise your borrower plans to join. It’s important to be aware that franchisors must provide prospective franchisees with a franchise disclosure document (FDD). This document includes extensive information on the franchisor’s system, enabling a...
Helping Women-Owned Businesses Thrive
Jun 27,2018
Women have come a long way in the business world since the time of Rosie the Riveter. Unfortunately, even in the 21st century, some women-owned businesses still struggle to secure access to investment capital — or to secure it at loan terms as favorable as men-owned businesses are receiving. How can you add more female entrepreneurs to your loan portfolio? Be aware of capital constraints Before you actively target this undercapitalized market segment, it’s important to know the unique financing challenges women-owned businesses may face. Federal lending laws prohibit discrimination based on gender, race or ethnicity. But the loan approval process can be somewhat subjective. Over the years, some female entrepreneurs have experienced routine denials to their requests for funding, despite owning healthy businesses. And, even when their loans are approved, female entrepreneurs sometimes receive less money (or higher interest rates) than male entrepreneurs with similar credit profiles. Therefore, even...
How Do You Determine Loan Prices? Loan-Pricing Models Are Key
Jun 27,2018
In today’s highly competitive lending environment, it’s tempting to try to gain a competitive advantage simply by setting your commercial loan prices according to what other banks in your area charge. Of course, competitiveness is an important issue in determining loan prices, but it’s far from the only one. Failing to account for such factors as desired return, cost, risk and credit profile can drastically reduce your competitive advantage. A better way to set loan prices is to conduct a thorough, objective analysis using a loan-pricing model. An informed decision A loan-pricing model can help you make informed decisions about whether it makes sense for your bank to match competitive rates. And, if you incorporate risk-based pricing into the model, you can more effectively customize prices based on a borrower’s credit profile, its relationship with your bank and the loan’s terms. Your model should consider a variety of risks. Generally,...
What Goes Up Must Come Down: Stay Ahead of the Curve
Jun 27,2018
With strong real estate markets in many parts of the country, lenders might feel they’re sitting pretty. But before you allow good times to lull you into complacency, remember that markets are cyclical. Are you prepared for the next economic slump? Weathering an economic downturn requires a plan. Yet waiting until the economy slows to develop one can lead to hasty, uninformed decisions. Instead of making plans under pressure, take time now to envision how your bank would respond to a softening in lending demand. This includes how you’d decide which loans you might call and how you’d deepen relationships with existing customers that you want to retain. Developing criteria for evaluating loans Before economic activity slows, develop quantitative and qualitative criteria to use in analyzing your loan portfolio — and identify loans to call when the economy softens. Rank your loans according to the likelihood of calling them and...
A Review of the New Tax Law: What Lenders Should Know
Jun 25,2018
A sweeping new law, the Tax Cuts and Jobs Act (TCJA), was passed in late 2017 with significant implications for businesses. Lenders need to be aware of these changes and understand the potential ramifications for their borrowers — both positive and negative — so that they can help customers take full advantage of any new tax breaks and minimize the adverse effects of provisions that will generate additional revenue for the IRS. What is the corporate rate? Under prior law, C corporations paid graduated federal income tax rates as follows: 15% on taxable income of $0 to $50,000, 25% on taxable income of $50,001 to $75,000, 34% on taxable income of $75,001 to $10 million, and 35% on taxable income over $10 million. Personal service corporations (PSCs) paid a flat 35% rate. For tax years beginning in 2018 or later, the TCJA establishes a flat 21% corporate rate. That rate...
Don’t Take Receivables at Face Value
Feb 01,2018
Don’t take receivables at face value Borrowers often use accounts receivable as collateral for their loans. But how can you ensure that your borrower’s receivables are truly collectible amounts? Lurking beneath the surface may be significant problems that, if not addressed, may lead to default. Do your research and get to know the warning signs that may indicate accounts receivable weaknesses — or even fraud.  Evaluating quality Accounts receivable represent the amount of money that customers owe a borrower for purchases. If a borrower pledges receivables as collateral to qualify for a loan or line of credit, lenders typically claim them to cover losses if the borrower defaults on repaying its debts. Poorly maintained or fraudulent balances hobble the lender’s ability to recover losses, however. That’s why the quality of receivables is important. When evaluating the quality of receivables for a new or existing borrower, begin by computing the days...
Due Diligence Matters
Feb 01,2018
A company’s financial statements are important in assessing a potential borrower’s situation. But thorough due diligence requires looking closely and deeply at all aspects of the company’s operations, from applicable economic and industry conditions to sources of collateral and business operations — and beyond. Only then can you, as lender, accurately evaluate the borrower’s financial status and minimize your risks of delayed payments and default.Assess risk and review financialsBefore you review a borrower’s financial statements, research industry risks. This risk assessment identifies what’s most relevant and where your greatest exposure lies, what trends you expect in this year’s financials, and which bank products the customer might need. Risk assessments save time because you’re targeting due diligence on what matters most.Now tackle the financial statements. First evaluate the reliability of the financial information. If an in-house bookkeeper or accountant prepared it, consider his or her skill level and whether the statements...

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