It has been said that "it takes money to make money", but few of us are born with the proverbial silver spoon in our mouths. For many business owners, a bank may be the first and most important port of call. Debt can be used to effectively weather difficult times, to help bridge the gap when growing the business and as a financial leverage tool to create business value.

From the banker's perspective, effective lending and the provision of financial products and services is key to long-term success. The savvy borrower, who builds a symbiotic relationship with the bank, can obtain financial products tailored to suit their needs. These include commercial loans, business credit cards, overdrafts and lines of credit.

This series will discuss bank borrowing, banking relationships and a bank's perspectives on lending money.

Topics include:

• Types of borrowing facilities provided by banks and financial institutions.

• Calculation of interest rates on borrowed funds; ·Lending covenants and restrictions.

• Advantages and disadvantages of bank lending.

• Building a lasting banking relationship.

Types of Lending

Business owners can benefit by appropriately using multiple bank lending facilities including loans, credit cards, overdrafts and lines of credit.

Loans

When assessing loan applications, bankers consider factors including:

• Credit worthiness - the capability and willingness to repay of the business owner in an individual/personal capacity and the business as a separate entity

• The level of security or collateralisation - a loan backed by collateral such as property or equipment, guarantors, stocks and bonds, inventory, insurance policies, personal savings accounts, reduces the bank's risk.

• Type of business and the current trends and economic projections for that type of business

• Financial records of the business - are they current and in order, where do cash outflows made by the business go, status of paperwork and maintenance of records, etc.

• Whether the business is solvent and financially viable - overall assets and liabilities of the business.

The savvy borrower recognises that as long as the bank's risk/reward criteria are addressed, one can ask for flexibility in the structure of a loan.

Negotiable attributes may include:

• Collateralisation options - What level of collateralisation is appropriate and what should the source of any collateral be?

• Will the level of collateralisation be adjusted over the term of the loan?

• When is collateral released?

• Repayment schedule - Is an amortised loan or a loan with balloon payments or irregular payments more appropriate?

• Is an interest-only period appropriate?

• Interest rate - Is a fixed or floating interest rate more appropriate?

• Is the proposed rate competitive?

• Term - What is the appropriate period of time over which this money will be borrowed?

Business Credit Cards

Credit cards provide access to quick financing for immediate requirements, without the administrative burden of conventional loans. For all intents and purposes, credit cards can be used as short-term unsecured loans. They may be used effectively for items such as travel and entertainment expenses, temporary cash-flow problems, etc.

Advantages include easy and convenient repayment, universal acceptance as a means of payment and doing away with the necessity to provide collateral to secure funding. Credit cards often also provide incentive programmes. On the downside however, interest rates are steep and charges can pile up if repayments are missed or delayed. Credit cards also provide limited access to capital and it should be noted that credit card usage influences the borrower's credit rating.

Overdraft (OD) and Line of Credit (LOC) facilities

Borrowers who have an established, positive relationship with the bank are ideal candidates for overdraft and line of credit facilities.

Overdraft facilities can be effectively used by a business with fluctuating cash flow to smooth its cash position. For example a building contractor who gets paid in installments and may receive a significant portion of revenue at the end of each project will need to have cash available on a weekly basis to pay employees.

Line of credit facilities can be effective for companies that import or export goods. Here, the bank acts almost as a trusted intermediary with the line of credit representing security for both parties.

Closing Advice

Take your banker out for a coffee today and have a chat about how he/she can help you to be a better customer and what he/she can do to help you create value in your business. That coffee will likely be repaid many times over.

This article is part of a series reflecting on some of the 'best practice' issues and considerations relevant to owners of privately held companies.

Asgill Post Ltd. provides assistance with Business Valuation, Financial Strategy and the Purchase and Sale of Companies. More information, visit www.asgillpost.com or contact Kumi Bradshaw MBA, CBA, BVAL via email at kumi@asgillpost.com or phone 295-3301 Patterson Partners Ltd. provides Bermuda/US cross-border tax, estate and investment planning services. For more information, visit www.patterson-partners.com or contact Jennifer A. Patterson, CFP®(US), CIMA®, TEP via email at info@patterson-partners.com or phone 296-3528.