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Credit Enhancements: Seven Tips For Enhancing Business Credit
Transactions
What are the avenues available to businesses with weak credit
profiles or to companies pursuing credit transactions that are
perceived as too risky by credit providers? Many companies apply
for credit at banks, finance companies or equipment leasing firms
and are routinely rejected due to the high degree of perceived
credit risks. When approaching a credit provider, it is helpful
to understand what can be done to reduce the risk of a credit
transaction in the eyes of the provider. Never accept a credit
rejection without considering credit enhancements. Here are a few
tips on credit enhancement to help guide you in approaching the
credit process:
1. Credit enhancements are modifications to credit
transactions that improve the risk-reward relationship for credit
providers. Enhancements can be real or merely perceived by the
receiving party. Also, they can be tangible things like real
estate and equipment or they can be intangibles like future
rights or options.
2. Use credit enhancements to strengthen credit transactions
and to improve pricing or terms. They may be used to entice
credit providers to approve credit transactions that would
otherwise be unacceptable because of the perceived risks. They
can also encourage credit providers to make transaction approvals
faster.
3. Credit enhancements usually fall within one of these
general categories: improvement in credit terms favoring the
credit provider; additional collateral; guarantees, insurance or
third party assurances; increased pricing, compensation or upside
gain potential; or granting of specific rights or options.
4. Some specific enhancements include: granting a security
interest in additional equipment, real estate, inventory,
accounts receivable, intellectual property rights or other
company assets; pledging cash; pledging securities; third party
guarantees; surety bonds; letters of credit; pledging cash value
of insurance; increase in transaction rate; additional fees or
other transaction compensation; shortening the term of certain
transactions; granting first refusal rights on future
transactions; permitting call options; obtaining re-marketing
guarantees or agreements.
5. When considering using credit enhancements to improve your
transactions, use these guidelines: try to get a fair and
objective assessment of your credit profile and the inherent
transaction risks from a knowledgeable credit person; take
inventory of the possible credit enhancements your firm can
provide; evaluate the cost of possible enhancements to decide
whether using them will be worthwhile; if there is time and
opportunity for a second chance to present your transaction to
the credit provider, present it first without the credit
enhancement or with the minimum enhancement you think acceptable;
of the credit enhancements available to your firm, decide which
ones will be effective and the degree of enhancement necessary to
achieve your objectives.
6. It helps to develop a credit enhancement strategy in the
planning stage of your transaction. Start by understanding the
transaction's credit strengths and weaknesses. Decide which
enhancements available to your firm will help strengthen the risk
profile of the transaction. Try to assess the credit provider's
sensitivity to various types and degrees of credit enhancement.
Later, if the credit provider turns down your transaction or
proposes unacceptable terms, ask the provider to suggest
enhancements that will make a difference in the decision. You may
be able to negotiate further, once you have this information.
7. All credit enhancements have a cost. In many instances the
cost is the opportunity cost of not having the credit enhancement
available for future use. Before offering or providing a credit
enhancement, do a thorough cost-benefit analysis to make sure the
potential benefit is worth the cost to your firm.
Though it is not always possible to enhance a credit to the
satisfaction of credit providers, you should understand the value
of credit enhancements and know when they may be useful. By
carefully considering potential credit enhancements, you can
often improve the pricing and terms of your firm's credit
transactions. If your firm has a weak credit profile, use of a
credit enhancement might make the difference between obtaining
financing or being rejected.
George Parker is a Director and Executive Vice President of
Leasing Technologies International, Inc. ("LTI"), responsible for
LTI's marketing and financing efforts. A co-founder of LTI, Mr.
Parker has been involved in secured lending and equipment
financing for over twenty years. Mr. Parker is an industry
leader, frequent panelist and author of several articles
pertaining to equipment financing.
Headquartered in Wilton, CT, LTI is a leasing firm
specializing nationally in direct equipment financing and vendor
leasing programs for emerging growth and later-stage, venture
capital backed companies. More information about LTI is available
at: http://www.ltileasing.com.
MORE RESOURCES:
Credit - Google News
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