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WHAT DETERMINES BANKERS’/LENDER’ INTEREST IN A NEW VENTURE? (PART 2)

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Bankers/lenders are primarily interested in a company’s margins and cash flow projections, because they concerned about how their loans or credit lines to the business will be repaid. The margins indicate how much room there is for error between the cost to produce the product (or deliver the service) and the selling price.

If margins are tight and the business has to lower prices to compete, the firm may not be able to pay off its loans as consistently and quickly as the bank would like. Similarly, banker look at cash flow projections to see whether the business can pay all its expenses and still have money left at the end of each month.

Bankers also look at the qualifications and track record of the management team and may require personal guarantees of the principals. Like investors, bankers or lenders want to know they are going to get their money back.

When considering a business plan and an entrepreneur for a loan, lenders have several concerns:

1. The amount of money the entrepreneur needs
Lenders are looking for a specific amount that can be justified with accurate calculations and data.

2. The kind of positive impact the loan will have on the business Lenders would like to know that the money they are lending is not going to pay off old debt or to pay salaries, but rather would improve the business’s financial position, particularly with regard to cash flow.

3. The kinds of assets the business has for collateral Not all assets are created equal. Some assets have no value outside the business, because they are custom-made or specific to that business and therefore cannot be sold on the open market. Lenders prefer to see industry – standard equipment and facilities that can easily be converted to another use.

4. How the business will repay the loan
Lenders are interested in the earnings potential of the business over the life of the loan, but even more important; they want to know that the business generates sufficient cash flow to service the debt. Fixed expenses are fairly easy to predict, but variable expenses such as those related to the production of the product or service, present a more difficult problem.

In an attempt to avoid any long-term issues, lenders pay close attention to the market research section of the business plan, which highlight the demand for the product/service. They also focus on the marketing plan, which tells them how the entrepreneur intends to reach the customer.

5. How the bank will be protected if the business doesn’t meet its projections
Lenders want to know that the entrepreneur has a contingency plan for situations where major assumptions prove to be wrong. They want to ensure that they are paid out of cash flow, not by liquidating assets of the business, which generally would only give them a small percent of the assets.

6. The entrepreneur’s stake in the business
Like investors, lenders feel more confident about lending to a business in which the entrepreneur has a substantial monetary investment. Such an investment reduces the likelihood that the entrepreneur will walk away from the business, leaving the lender stranded.

Bernard TaiwoBernard Taiwo
Bernard Taiwo
I am Management strategist, Editor and Publisher.

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