Business to Business lending

Introduction

  • In a modern entrepreneurial economy business to business lending needs to be approached differently. Convention needs to be challenged and entrepreneurship given space and opportunity.
  • The micro enterprise today could very well be the Google of tomorrow
  • Lenders need to be both intuitive as well as analytic in their assessment, one without the other could prove to be fatal.

This article focuses on 4 key lessons to enhance one’s intuition and analysis.

Lesson 1 – Reduce risk by assessing:

Management

  • Thoroughly analyse future prospects were companies have young entrepreneurial management teams which only managed through a growth phase and not downward cycles
  • Be circumspect of companies with weak management information systems in today’s modern tech savvy economy

Risk Appetite

  • Beware of borrowers with high risk appetite against small absolute size with preparedness to take large financial risk

Strategy

  • Avoid companies highly dependent on connections to make money together with the absence of a coherent business strategy

Cost Structure

  • Be wary of businesses with a low cost structure because:
  1. Often they lack depth of management
  2. They are stretched in the tough times
  3. Too much emphasis on trusted employees -trust does not equal competence

Lesson 2 – Be aware of key decision makers:

Management and Owners

  1. Intermingling of private and business assets
  2. Gearing above personal debt
  3. Family dynasties – is the next generation so skillful / hungry

Lesson 3 – Pay attention:

  • to “flavor of the month” sectors – be careful with perceived internal expertise
  • to forecasts for market growth particularly where there is a progressive build of expectations
  • to highly leveraged companies because they are more vulnerable to smaller shocks
  • to reliance on “name”
  • to where you and other lenders lend

Remember – “Speed of Action” if warning signs emerge.

Lesson 4 – The detail

Financials Information:

  • Review intelligently
  • Projections – a dose of scepticism might be helpful
  • Devil is always in the detail but don’t lose sight of the big picture