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