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Previous Issues
Issue 30: Loan Sale Premiums Hold Steady in November

Issue 29: Proper Risk Management Protection and Credit Worthiness

Issue 28: BoeFly Helps Veterans With Disabilities Connect With Lenders to Obtain Small Business Loans

Issue 27: Loan Sale Premiums Level off in October

Issue 26: SBA Secondary Market changes - Warranty Period and Premiums on New Larger Loans

Issue 25: BoeFly Surpasses the $1 Billion Transaction Mark

Issue 24: Loan Sale Premiums Continue Climb in September

Issue 23: Robert Tannenhauser, CEO of BoeFly, Interviewed by Michael McKee on Bloomberg Radio

Issue 22: Lender Optimism is up While Anxiously Awaiting the Small Business Jobs Bill

Issue 21: Loan Sale Premiums Blast to Record Highs in August

Issue 20: Title Insurance- the Lender's Perspective

Issue 19: Condemnation and Mortgage Lender's Rights

Issue 18: Long-Term Deals Continue Record Climb; Short-Term Deals Fade

Issue 17: Congressman Walt Minnick (D-Idaho) Gets It

Issue 16: Deeds and Forms of Ownership

Issue 15: SBA Loan Sale Premiums Hit Record High in June

Issue 14: What You Need to Know About Property Insurance

Issue 13: SBA Fixed Interest Rate Loans are an Important Product to have at the Ready

Issue 12: 504 Guaranteed Pool Program Summary and Survey Results

Issue 11: Loan Sale Premiums Surge to Record Highs in May

Issue 10: Environmental Risk for Lending Opportunities

Issue 9: How To Take Advantage of the First Lien Position 504 Loan Pool Guarantee Program

Issue 8: Investors Remain for SBA Loans

Issue 7: Retirement Funds for an Equity Injection - Selecting the Right Plan Provider

Issue 6: Why Outsourcing Environmental Risk Management makes Cents for Lenders

Issue 5: Loan Monitoring: Comfort in a Crisis

Issue 4: BoeFly Case Study: The economics of selling SBA guaranteed loans

Issue 3: BoeFly Lender Survey Results Q1 2010

Issue 2: Loan Sale Premiums Rally in Q1

Issue 1: The Importance of Efficiency in Secondary Markets

PROPER RISK MANAGEMENT PROTECTION AND CREDIT WORTHINESS

By Albert Sirota, The Washington Group


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Lenders have numerous and varied criteria for determining which potential borrowers are most credit worthy. In this tight money environment, to the chagrin of so many hopeful borrowers, lender due diligence has significantly heightened. One critical criterion that the lender must take into account is the future business viability of the applicant/borrower.

Loans go bad for many reasons, not the least of which is business failure, and businesses fail for many reasons- growing too fast, poor quality and fiscal control, failure to make appropriate use of the latest in technology, excessive promises, poor marketing, stiff competition and inadequate risk management and business continuity protection, to name but a few. Fortunately for the lender the latter reason is one potential variable over which it can have some protection. We are not focusing merely on protecting the loan with life insurance, that is a given. The focus here is on protecting the business itself.

The lender in the exercise of due diligence will be more likely to approve a loan if the applicant/borrower has taken steps to substantially increase the likelihood of business continuity by:

  1. Completing a business valuation, preferably a certified business valuation;

  2. Having in place an executed buy-sell agreement between partners and/or shareholders fully insured with life and disability buy-out insurance that has been regularly updated with additional insurance to cover

    a. An increase in the business value and thereby an increase in partner equity;

    b. An increase in partner equity resulting from a sale among partners;

    c. The addition of a new partner with an equity position sufficient to warrant inclusion in the buy-sell agreement with full insurance coverage; and

  3. Having a business succession plan in place.


In addition, many businesses have non-partner, non-shareholder key employees whose untimely death or disability could seriously impact on the viability of the business. There are techniques for assessing an individuals' value to the business in the event of death or long term disability. This is not a science but insurance companies have specific key person life and disability policies for just this purpose and experienced life agents will assist in helping the business make a fair value assessment.

Often, and particularly with newer firms undergoing the usual growing pains, the cost of insurance is an issue. If so, the company should conduct a thorough review of current expenditures to determine where funds may be located in areas far less critical than the future stability of the company. Do this first and then sit down with your banker. She/he will sit up straight and take notice. Long term stability protects the bank's loan and comprehensive risk management protection helps to give the banker a comfort level about your firms' long term stability and your business savvy. It follows that this will increase the odds for securing a loan in your favor.

Good hunting!

For more information please contact Albert Sirota at (703) 865-6414 or email him at asirota@finsvcs.com.