No doubt, obtaining a commercial loan is a difficult task. Most businesses took negative revenue hits the last couple of years; but, in large part businesses have weathered the storm. In this time of recessionary recovery some businesses expect to not just breakeven, but possibly realize a profit. Moving towards growth, businesses are beginning to visit banks in anticipation of financing pending developments. However, funding emerging growth trends will be a challenge without historical revenues and cash flow banks require.

Bankers are having difficulty finding customers that fit into the tight credit parameters for lending. However, savvy bankers understand that although many potential customers may not meet credit standards today, given a little time and maybe a little help, they might in the near future. Here’s the rub; customers want a complete package (the loan piece and depository relationship) and remain unwilling to move business over piecemeal. This situation is precisely where working with FSW can close the gap.

By providing a short term alternative loan solution, customers will be more willing to bring over deposits and move their entire banking relationship to the bank and banker who provides the introduction to the solution. Factoring provides growth capital, makes for a profitable company, along with motivating deposits.

It’s no secret that banks and bankers are hunting down deposits. Savvy bankers set themselves apart with a competitive edge; a FSW partnership is a leg up in providing loan alternatives to drive deposits.

This article is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

We hear a lot from small businesses about how hard it is to get a loan and a lot from bankers that demand from credit-worthy borrowers is down. Now a new study provides insights into the situation, by exploring the top reasons why banks are turning down applicants, along with plenty of other data. And because it includes asset-based lenders and other funding sources, it offers a wider view of just what’s going on in the financing landscape.

The study, from researchers at Pepperdine University, surveyed 1,430 borrowers, lenders and investors, looking at changes over the past six months. Since the most detailed analysis focused on banks and asset-based lenders, here’s a look at the most salient points:

Banks – Demand certainly does seem to be down, judging from responses from the 56 banks studied. About 11 percent reported an increase in applications over the past six months compared to 77.2 percent who had a decrease. But the quality of borrowers is up, according to 55.6 percent of those surveyed. That’s compared to 22 percent who reported a drop. And the number of approvals? That’s gone through the roof. About 76.5 percent reported an increase.
What are the reasons for turning down applicants? Top on the list is quality of cash flow. Almost 25 percent cited that as the reason. And 20.8 percent pointed to quality of earnings.

Asset-based lenders – The 52 asset-based lenders reported the mirror opposite, at least when it comes to demand. Sixty percent had an increase in applications vs. 8.7 percent who experienced a decline. Also while more lenders reported a drop in the credit quality of applicants, a majority saw an increase in the quality of borrowers who were approved.
As you might expect, the top reason for rejecting an application was insufficient collateral (30 percent). “In the weak economic environment, the valuation of collateral is going down,” John Paglia, an associate professor at Pepperdine and author of the study, said to me. Second on the list was quality of earnings (15.8 percent).

What’s it all mean? For one thing, asset-based lenders are attracting more interest from prospective borrowers, but the economy has done a number on their most important criteria, collateral. As for bankers, it seems they’re on the level when they say they want to make loans, but they can’t find suitable prospects.

Remember, if you are looking for a working capital line of credit contact Factors Southwest.

Credit is still tight for America's main stream small businesses. Even the Fed Chairman, Ben Bernanke, is concerned about the ongoing concern about "tight" credit markets. Read more...

To find out about alternative financing solutions, checkout www.factors-southwest.com

Let's examine the next of the 5 C's of credit - Capital.

CAPITAL (NET WORTH) refers to how much do the owners have invested in the company.

How much have the owners invested in the company?  
A bank may also be interested in how much capital has been invested by the owner, which requires calculated risk. 

• Financial statements and personal credit reports or statements assist bankers in knowing how much an owner’s personal resources can support the business as it is growing. 

• For companies that have yet to make a profit, elements such as an excellent customer list and payment history also come in to play.  Bottom line: the business should be perceived by a bank as solid.

Debt to Equity Ratio also known as Liabilities compared to Equity
Banks essentially are looking for sufficient equity in the company on the part of an owner. 
Sufficient equity can aide a business when times are soft. 

• It’s important a company be able to sustain itself during tough times. 

• Additionally, banks want assurance that an owner is truly invested in the company and will do what it takes to turn things around if cash flow becomes a problem. 

• When examining capital, banks typically analyze the company’s total liabilities compared to equity, or the Debt to Equity Ratio.  Most banks like to see the Debt to Equity Ratio no higher than 2 to 3 times.

• Collateral are assets offered by a company as an alternate repayment source. 
• Typically these assets include real estate, accounts receivable, inventory, and equipment. 
• In a liquidation scenario, accounts receivable can be used to pay down a loan, while equipment and real estate can be sold to generate income to pay down the loan as well. 
• Until a business is established, a business owner will need to pledge collateral that may be linked to personal assets, such as a house. 
• No one wants to be in the position of losing a home because a loan has not performed.  A business owner needs to think carefully about how he or she will handle the collateral element when borrowing money from a financial institution.

Beginning or expanding a business can be an exciting venture.  But to do so successfully, a business owner is going to need capital.  That comes from either the owner’s personal check book or financing extended through a bank. 
 
To secure financing through a bank, a business owner must understand the 5 C’s of Credit.  These guidelines are used by financial institutions as a way of analyzing a borrower’s request for a loan. 

Let’s take some time to examine each of the 5 C’s of credit:

Cash flow – 1st form of repayment

Does the company make money? Has the company made money for the last three years?

• A business owner may feel he needs additional capital to run a business, but he must also demonstrate the ability to repay the loan being considered. 
• In determining this, a bank will analyze the “EBITDA” ratio which looks at a business’ Earnings Before Interest, Taxes, Depreciation and Amortization.  Broadly speaking, it’s the measure of the cash flow generated by a business.  This is the cash flow available to repay the debt once the company has met its other payments required to sustain the business.

What is the loan going to be used for?

• Banks like to know if the loan proceeds are going to positively increase cash flow. Remember cash flow is the 1st form of repayment.
• A sound business plan will ensure the business understand how to use the loan proceeds to increase cash flow and grow the company.