credit committees appear to have a
different set of marching orders than
bankers who enthuse, “We’re lending,
and we’re interested in lending to you.”
Credit committees don’t seem to attach
much credence to a borrower’s story.
Committee members operate under very
specific guidelines, and many of these
committees will not sign off on a loan if
they detect the remotest possibility that
the bank might lose money on the deal.
If a borrower can’t convince the bank
that it will be repaid and get that story
into the hands of the credit committee,
the loan will not be approved.
Rick Winston is the founder of E.H. Winston &
Associates, a professional services firm specializing
in operational, financial, and bank debt restructuring
support to emerging growth and middle market
companies since 1985. He can be reached at
email@example.com or 949-706-1951.
either orderly liquidation value (OLV)
or forced liquidation value (FLV).
leverage that is acceptable to the bank
today, even if the applicant’s company
is currently cash-flow positive.
Usually, credit committees justify their
lending decisions on the collateral
borrowers have to support their loan
requests. Not only must most businesses
demonstrate prior year profitability to
get a loan, but they also must have 100
percent collateral to support their loan
requests. However, only certain collateral
is acceptable to the credit committee.
Accounts receivable, money owed to a
business, are “eligible” or “within term”
and therefore are assets that a credit
committee can embrace. Moreover,
a business that owns and occupies
commercial real estate has another asset
of which credit committees are fond,
as long as an appraisal pegs the value
of the property within a loan-to-value
(LTV) ratio that is acceptable to the bank.
If a business has acceptable collateral, it
is given an advance rate established by
the bank. Eligible accounts receivable
are assets of preference and typically
carry the highest advance rate of any
collateral asset today. On the other
hand, traditional business assets used
as collateral, such as inventory and
machinery and equipment, are deemed
less desirable by banks today, so advance
rates for those assets are calculated at
Inventory and equipment and
machinery are less attractive as
collateral to banks because they are far
less liquid than accounts receivable
and therefore are much more difficult
to convert to cash to quickly repay a
loan that has gone into default. Even
though businesses need inventory
and equipment to generate revenue
and profit, business owners must
recognize that lenders simply will
not advance as much credit based
on these types of collateral.
So American businesses today face a
dilemma in their dealings with Main
Street banks. Despite assurances by
these institutions that they have money
to lend, banks and especially their
credit committees—decision makers
to whom business owners are rarely
able to explain their stories face to
face—are extremely risk-averse. Credit
committees aren’t interested in learning
why a borrower deployed capital as he or
she did in the past, only in the fact that
those decisions put the company in a
cash-constrained position. Committees
won’t approve loans to borrowers
whose historical debt exceeds a level of
Main Street banks are especially risk-
averse in troubled times. They want
someone like the federal government to
guarantee their loans whenever possible.
Failing that, however, banks may
insist on 100 percent collateral from a
borrower, prior year profitability, interim
profitability, and strong guarantors that
are liquid so that a secondary source
of collateral is tied to the loan before
they will agree to lend in the current
economy. Unfortunately, a business
owner who is looking for a loan to
support the operation and/or growth
of his or her business and is declined
may have no other alternatives.
However, when they continue to ignore
investments that business owners made
in inventory and machinery during
the recession, which often tied up their
limited capital, and fail to appreciate
that leveraged debt that accumulated
during the ugly years of 2008 through
2010 in many cases represented an
investment in the future success of
these businesses, then Main Street banks
are simply giving lip service to their
contention that they want to make loans.
Jon Kris Consultants, Inc. Executive Search dedicated in recruitment of
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We share the vision, spirit and commitment, with our clients, and offer a
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973.236.1800 • Fax 973.236.1600 • www.jonkris.com
Emerging growth or middle market
businesses today, which form the
foundation of the American capital
pyramid, will not profitably bounce back
until Main Street banks step up to fund
companies that can show a positive
cash flow and the ability not only to
service historical leveraged debt, but
also to handle new commercial and
industrial debt that they are seeking.
As long as the capital from Main Street
banks is being withheld through
inflexible credit policies, the U.S.
recovery will continue to crawl along
with minimal growth, and American
businesses will continue to fail. J