| Essential reading for business owners. Retired financial | | | | - What would be a reasonable liquidation value of the |
| executive explains how the banker views your | | | | inventory, after auction and liquidation expenses? Is |
| business loan application, and collateral, so you know | | | | there a ready market for them? Will one have to |
| how to present it. One of a series of articles to help | | | | store them at an expense, and attempt to sell them |
| business owners succeed in understanding how to | | | | in the next season? Would the liquidation value cover |
| optimize their financing and keep their banker happy! | | | | the loan? Would the bank have to incur any |
| This segment will explain the essentials of how a | | | | expenses to render the inventory saleable? Will |
| bank evaluates the inventory that is offered as | | | | custom duties have to be paid before the inventory |
| collateral for a business loan or an operating line of | | | | is released from bond, in the case of importers? |
| credit. As explained in the segment on equity, this is | | | | - What percentage of your existing inventory, if any, |
| not supposed to be a text book course, but explains | | | | is covered by customer orders? Or is it purchased on |
| briefly what you will encounter in the real world of | | | | speculation, in the expectation that orders will come |
| business finance. | | | | in? |
| These comments are not for the retail business; they | | | | - When was the last physical count done of the |
| apply to wholesalers, importers and manufacturers. | | | | inventory? Was the count supervised by the |
| The amount of money the financial institution will be | | | | auditors? Is the dollar value based on GAAP ? |
| prepared to lend you will depend a great deal on the | | | | (generally accepted accounting principles) |
| amount and ease of realization of the inventory | | | | - Depending on the nature of the widgets, how |
| collateral you can offer to cover the loan, in case | | | | often does the inventory turn over each year. Is it |
| there is a default in repayment. | | | | comparable to the industry average? |
| It is not just the amount of the collateral, but the | | | | It is unusual for a bank to finance more than fifty |
| quality of the collateral, and whether it would realize | | | | percent of the cost value of inventory, because of |
| enough to repay the loan if there was a liquidation of | | | | the risks involved. |
| the business. | | | | However, if you are an importer and you require the |
| A typical example might be that your main collateral | | | | bank to open letters of credit for your suppliers, the |
| for a $1 million loan application is your inventory of | | | | bank may provide higher financing if you can show |
| widgets. The widgets will cost you $1,250,000 and | | | | that a substantial portion of the inventory being |
| you expect to sell them for a total of $2,000,000 | | | | bought is against customers' purchase orders. Your |
| which would gain you a $750,000 profit. | | | | borrowings, as shown in your cashflow projections, |
| You would think your bank would be pleased to | | | | should also be within the line of credit approved for |
| approve the loan. | | | | your business. Always keep in mind, when making |
| These are some evaluation techniques related to the | | | | your credit application, that bankers hate surprises! |
| inventory that the bank will utilize before the credit | | | | Give them all the information they need to make a |
| approval decision can be made: | | | | credit decision upfront. If there is any negative |
| - Quality of the widgets: What percentage, if any, | | | | aspect, bring it up and explain how you plan to deal |
| are damaged and non-saleable? Are they a seasonal | | | | with it. |
| item and, if so, are they carried over from the last | | | | Additional segments will deal with collateral other than |
| season, or are they current? Are they a basic | | | | inventory, as well as other aspects of commercial |
| necessity or a gimmick that may not last? Are they | | | | finance you will find useful to know. |
| easily saleable? | | | | |