The 3C’s to Better Credit – the Lenders Edition

On September 26, 2018, the Federal Reserve raised interest rate by 0.25%. That brings prime rate to 5.25%. Rate has been increasing at 0.25% interval at each quarter this year. I recently presented the 3 C’s to Better Credit in front of local business owners and arming them with valuable information on how to prepare themselves before talking to lenders. The best time to talk to lenders is NOW before rate continues to rise again and the cost of borrowing becomes a factor hindering growth. This could put a stop to growth plan and ultimately lead to layoff or going out of business.

Recently, I attended a panel discussion at the Commercial Finance Association in Tampa and asked the panelists (bankers and alternative funding professionals) this very important question. The answer not only doesn’t surprise me, it confirms what I have always believed that being proactive is always the best approach.

I asked that if businesses are planning on obtaining a loan, are there things that they can do to prepare themselves, not only to set themselves apart from their competitors but also would enable them to get financing quickly and with less frustration? The panelists responded that business owners should ensure that the business’s accounting and finance are in order. It is important to know that underwriters don’t begin the process of their evaluation and risk assessment until ALL requested information, both financial and non-financial, is received. Underwriters need to see the complete picture when forming those analysis. If business owners are not prepared, they could run into problems at the 11th hour and causing significant delay or even denial to much needed capital.

At CFO Connections, we educate business owners on the 3 C’s to Better Credit:

  • Credibility – show lenders you are serious by doing your own due diligence and get your accounting and finance in order and up to date. This could include doing a public record search on any potential outstanding lien and updating corporate records and creating a short list of vendors that may be a good fit based on service level, industries served, terms, or even locations, ensuring accounting records are up to date and having a deadline driven month end closing schedule.
  • Cash flows – use processes and systems to build consistent and predictable cash flows. Lenders need to know that a business can make payments on its debt. When a business has these processes and systems, it speaks to its ability to service the debt, and therefore, instantly attracts lenders’ attention.
  • Control – use effective internal control to protect cash flows and assets used as collaterals. Having all the cash flows in the world doesn’t mean much if they were threatened by fraud and embezzlement because of lack of internal control. By the way, 42% of small businesses with less than 100 employees are more susceptible to fraud as a result of lack of internal control, compared to businesses with more than 100 employees. Losses suffered by these smaller businesses are twice as much (approx. $200k) as that in larger businesses (approx. $104k).

We provide these services to business owners to help them proactively manage growth in their business. We believe that in doing so, it puts them ahead of their competition and makes them instantly appear more attractive to lenders. When a business is credible, has cash flows and controls to mitigate fraud, it becomes easier and quicker for lenders to make the important decisions, saving them more energy to work on the next deal.

If you are working with prospects or clients that are struggling to provide you the information you need, we can help smooth out that process by helping them strengthen the 3 C’s. Please reach out to us so that we can better help you and your clients and prospects. E-mail to [email protected]

Growing Your Business in a Rising Rate Environment

In June 2018, Federal Reserve Chairman Jerome Powell spoke at a news conference. Mr. Powell said that the economy had strengthened significantly since the 2008 financial crisis. Mr. Powell signals that rate could go up twice again during the remainder of 2018 and again in 2019. The Wall Street Journal prime rate currently sits at 5%, up 0.75% from a year ago.

It is certainly good news that our economy is strong but what does that mean for businesses that need to borrow to grow? Here is what commercial lenders recommend: be proactive and start talking to lenders now.

Applying for a business loan is not any different from applying for a mortgage. You fill out an application, provide the necessary documents, and wait for a call from the mortgage company. You anxiously wait for that call and when you finally hear from the mortgage company, 9 times out of 10, it isn’t a go right from the beginning. The mortgage company has done the due diligence on you and is now requiring you to clean up your record before giving you the green light. If that isn’t stressful enough, you now are concerned that your dream house could be off the market in the time that it takes you to “get everything nice and pretty”. Does this scenario sound familiar to you?

Commercial lenders use a similar approach when evaluating companies applying for loans. You can be certain that one of the companies is likely your competitor. How do you position yourself at the front of the pack to get the lenders’ attention? The key is to understand what kind of due diligence they perform to uncover the weaknesses in your businesses. Wouldn’t you, as the business owner or CFO of the company, like to know those weaknesses and proactively correct them before going to the lenders? In addition, lenders use the 5 C’s approach to size you up against other companies vying for capital to grow their businesses. They use them to evaluate your ability to service the loan and the strength of your collaterals, among other things.

Time is money. That rings even more true when growing your business in a rising rate environment.

  1. Do you have a growth plan in the next few years that requires capital to bring it to fruition?
  2. Do you want to attract lenders’ attention and obtain the most favorable terms?
  3. Do you want to be your industry’s leader?

We are passionate about helping businesses grow. At CFO Connections, we help business owners become less anxious about time and money. We help businesses rise to the top of their game by improving cash flows, and building and protecting business value. If you answer YES to any of these questions, please contact us and we will stop by for a complimentary visit!