Continuing from the previous post regarding the 5 Cs of Credit,
The first C is ‘character’. One of my favorite inspirational thoughts is the statement about leadership that ‘The ultimate measure of leaders is not where they stand in moments of comfort and convenience, but where they stand in times of challenge and controversy’. Our current conditions provide a great opportunity for entrepreneurs and CEOs to demonstrate their character.
Next is ‘capacity (cash flow)’. Comprehensive cash flow tracking and forecasting is more critical than ever. More companies should be using weekly cash flow tracking and forecasting rather than traditional monthly reporting. The business leaders must make the tough decisions while demonstrating to customers, employees, and the lenders that those decisions are prudent and not risking the long term value of the company.
The ‘capital’ (equity) invested and supporting new loan decisions is likely getting more attention. The equity portion for asset based loans is rising. Although this may be frustrating to business leaders accustomed to historical loan to value percentages; I would encourage those entrepreneurs and CEOs to put in perspective that the same equity they have and can commit to new loans will simply support somewhat lower loan balances and therefore somewhat slower growth in funded assets.
Of course, in conjunction with less leverage is more ‘collateral’. Whereas loans without collateral may be getting hammered, lenders are looking for opportunities with traditional collateral – receivables, inventory, and equipment. The business leaders will likely need to pay more attention to demonstrating the quality of collateral.
The most challenging factor is the current ‘conditions’ of the company and the economy. The business leaders must be able to demonstrate strategy, action already executed and having an impact, and a reliable vision and path that the business will navigate during the current economic challenges. The question is which business leaders will demonstrate they will be successful for our next wave of economic growth. Business leaders should not let the more challenging loan underwriting scrutiny discourage them. We must simply work harder and smarter to execute the fundamentals of the 5 Cs of credit in order to be the winners in our economic recovery.