Q&A: What Matters Most to Lenders?

By Features Business on Main

I watched your webinar on how to increase the value of a business. Now I understand why investors care about so many different components of a company. But do banks care about the same things as investors? What matters most to lenders?

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Great question. In the webinar, I talk about the elements of “Transaction Value” — that is, how much a business buyer or investor is willing to put into your company. These elements are a company’s brand value, customer base, gross profit margins, market and intellectual property — and they’re very relevant to commercial lenders’ decision-making.

Because lenders are dependent on a company’s cash flow to pay monthly interest and principal obligations, any factor that directly increases or decreases a company’s existing and future cash flow generation will be closely scrutinized by commercial lenders.

As such, a company’s gross profit margin is highly influential to lender decisions because it’s an indication of the company’s future cash-flow generation, competitive standing and operating flexibility. Lenders will also look closely at a small-business owner’s customer base for additional evidence of cash-flow stability. Companies are best positioned if they have a consistent track record of customer diversification, repeat business and customer payment within 45 days of invoice.

The Small Business Administration has also relaxed some of its rules for its partner banks to lend to business buyers. Now it’s easier for business buyers to receive SBA-backed loans to help finance transactions which involve “goodwill,” or the purchase of intangible assets such as intellectual property, a brand, customer lists, etc. This means that business owners may be able to reap higher prices for their businesses — all because business buyers might be able to find more favorable acquisition-related debt funding.

Finally, keep in mind that of the five primary elements of "Transaction Value" discussed during the webinar, a company’s market is the least influential to commercial lenders.

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— Susan Schreter

 

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