Category: Finance

commercial lending commercial loans commercial loan structuring Blog

Commercial Loan Structuring

When businesses need money to buy a new piece of equipment or to fund short-term operational costs, they’ll most likely consider taking out a commercial loan. A commercial loan is credit that’s typically extended to businesses, such as partnerships and corporations, which are looking to fund a particular expenditure (e.g., new equipment) or another specific business purpose. 

This debt typically involves a security, meaning businesses might be required to submit their financial statements or put up a collateral, which can be equipment, other business property, or even accounts receivables. The most common types of commercial loans include lines of credit, term loans, commercial mortgages, and acquisition loans. 

Now with each commercial loan comes specific terms that the business as a debtor must abide by. These terms include the purpose of the loan, its amortization period, the repayment schedule or interval, the loan collateral, and the interest rate. All of these compose the commercial loan structure. 

What is commercial loan structuring?

At its core, commercial loan structuring is a matching game: Commercial lenders identify the needs of the business and its repayment source and compare those with the available financing options that fit. A loan structure is designed to cater to the needs of both the lender and the borrower. The business receives the funds it needs, while the lender is protected from risks and potential losses should the business default on its payments. In short, it provides a win-win solution to both parties.

According to the Risk Management Association, commercial lenders make use of four keys to come up with the best loan structuring possible for each business borrower. The first two are the goals of the bank or commercial lender and those of the customer or debtor. The third key is the source or sources of repayment and the competition the lender faces for them, and the fourth key are the loan elements that the commercial lender or bank deem are appropriate for the other three keys.

The components of a commercial loan structure

A commercial loan structure consists of the following components. When people talk about commercial loan structure, this is what they typically mean.

  • Loan term – This is the period in which the business has to repay the loan. This period is determined by the lender.

  • Interest rate – This is the amount the lender charges the business debtor and is usually a percentage of the principal loan amount.

  • Credit risk – Simply put, this refers to the probability that the lender won’t receive the loan repayments from the business. That is, the debtor or borrower has defaulted on the loan or failed to pay for the principal and interest owed to the lender. In addition to financial loss, high credit risk also increases collection costs.

  • Loan collateral – This is a valuable item that a business pledges as security for the loan. A collateral reduces the risk of the debtor defaulting on the commercial loan as it can be sold so that the lender can recover its losses.

  • Repayment – This refers to a period in which the business can pay back the principal and the interest of the loan. Commercial lenders typically ask about the business’ source of repayment and if it has alternative sources of repayment.

Factors that influence commercial loan structuring

There are several factors that influence how a commercial loan will be structured. These are as follows: 

  • Purpose of the loan

For what purpose is the business taking on the commercial loan? It could be to reduce an existing term debt or so that the business has revolving credit available.

  • Risk profile of the business

Is the business more likely to default on its loan repayments? This is the question that commercial lenders seek to answer when assessing a business’ risk profile. They do so through complex models that help them determine the risk rating of a borrower. Normally, the higher the risk rating is, the greater the possibility of that debtor to default on a repayment.

  • Ability to pay the repayments

Does the business have the ability to fulfill the payments within the loan term? Where does its repayment funds come from? Does it have other sources it can tap to fulfill the loan repayments?

  • Desirability and useful life of the collateral

Most commercial loans require collateral, and this influences the loan structure too. In this case, the commercial lender will check the quality of the asset. The higher the asset’s quality is, the more desirable it is, and as a result, the loan structure will be more flexible. The collateral’s quality is determined by how likely it will retain its value, how active the secondary market is, and if its price can be ascertained easily.

  • Transaction or asset-specific risks

This covers the details of the loan agreement. For instance, should a loan covenant be in place to safeguard the interests of the commercial lender and if yes, what should the covenant include? Basically, anything that the lender finds is risky, it can try to mitigate through the terms or covenants included in the commercial loan agreement. 

Why is loan structuring important?

Loan structuring is important for both commercial lenders and their debtors, aka businesses. For businesses, especially those involved in an enterprise that’s seasonal in nature, commercial loan structuring can allow them access to funds during their low or off season. On the other hand, for commercial lenders, loan structuring means securing the best chance for the loan to be repaid by the business, whether that’s from cash flow, asset liquidation, or other sources. If a commercial loan is not structured properly, both parties won’t be able to achieve their individual goals. 

On the other hand, appropriate commercial loan structuring can provide many benefits to the lender and the borrower. A properly structured commercial loan can help the lender mitigate risks and price the loan so that it provides an acceptable yield. For the business, it means tax benefits, protection of collateral, and the opportunity to be able to restructure the loan in case there’s a change in its situation.

Commercial loan structuring

In short, appropriate commercial loan structuring is a win-win for both the lender and the borrower.

Finance

How Can a Company Improve its Financial Stability?

When looking to regain financial stability and return to conventional financing as soon as possible, asset-based lenders tend to have the opportunity to provide working capital to medium-sized businesses with a nimble approach that typically includes some of the following:

  • First security interest in all assets of the borrower

Asset-based lenders first take a security interest in all the borrower’s assets, meaning they can take ownership of the assets if the borrower defaults on their loan.

  • Personal guaranty of principal owner(s) > 20%

The lender also requires a personal guaranty from the business’s principal owner(s) to repay the loan.

  • Weekly borrowing base reporting

Additionally, the lender requires weekly reports on the business’s borrowing base and quarterly field exams to ensure the loan is used responsibly.

  • 12-month facilities; no early termination fees

Meaning the borrower has the flexibility to pay back the loan over a set time

  • Full dominion of funds, with lockbox

With an asset-based loan, the lender has full dominion of the loaned funds

  • Quarterly field exams

By working to understand the client’s business, these types of companies can structure flexible financing with asset-based lines of credit, construct financial packages that meet the immediate needs of the business, and help companies regain financial stability to return to conventional financing.

Financial stability is essential for any business, big or small. It is the ability to maintain a healthy cash flow and balance the needs of the business with its available funds. Without financial stability, businesses can struggle to meet their financial obligations, leading to decreased performance and the potential for bankruptcy.

One way a company can improve its financial stability is to work with an asset-based lender. This type of lender works with businesses of all sizes to provide financing for their operations.

In short, asset-based lenders can provide businesses with a way to improve their financial stability. By working with an asset-based lender, businesses can access the funds they need to continue operations and grow their business. The lender’s structure ensures that the loan is used responsibly and that the business is held accountable for its repayment. As the business’s financial stability improves, it can return to conventional financing.

How do you ensure financial stability of a company?

When attempting to ensure financial stability, businesses should first and foremost contact a professional who can help them navigate the process most efficiently and cost-effectively.

  • Get advice from a professional
  • Recover outstanding debt.
  • Reduce or rearrange expenses.
  • Sell assets.
  • Offer markdowns or increase prices
  • Consolidate debt
  • Use new marketing techniques
  • Offer additional payment options
  • Look for government grants
  • Keep track of and improve your cash flow

Financial stability is essential for businesses of all sizes.

Businesses should also consider recovering outstanding debt, reducing or rearranging expenses, selling assets, offering markdowns or increasing prices, consolidating debt, using new marketing techniques, offering additional payment options, looking for government grants, and keeping track of and improving their cash flow.

To be clear, ensuring financial stability requires a multi-pronged approach. By consulting with a professional and taking steps to reduce expenses, increase revenues, and improve cash flow, businesses can ensure they have the resources to meet their financial obligations and remain sustainable.

How to improve the company’s market performance

Improving market performance is a key goal for any business. Market performance can be improved by taking a comprehensive marketing approach. Just another area of your business that you should leave up to the professionals to do. Here are some tips on how to improve market performance from a marketing perspective:

Start by creating a comprehensive marketing plan. A comprehensive marketing plan should include a detailed analysis of the target market, competitive landscape, and marketing objectives. It should also include a timeline for implementation and a strategy for evaluating results.

Utilizing multiple marketing channels, such as email, social media, and traditional advertising, can help reach more potential customers and increase brand visibility.

Utilize data-driven strategies to help your business determine which marketing strategies are most effective and where they should focus their efforts. But, again, a good marketing company should do this for you.

A focus on customer retention should be a top priority for any business. Utilizing customer loyalty programs, providing excellent customer service, and creating an engaging customer experience can help businesses retain customers and increase their market performance. In addition, maintaining a solid form of communication should be a top priority with your marketing company.

Track your progress. Tracking progress is essential for monitoring the success of marketing efforts. Utilizing analytics tools can help businesses assess the effectiveness of their strategies and make adjustments as needed.

Digital marketing includes a great website (a place where you can showcase your content as well as products and services). It can also mean utilizing social media channels, as well as email campaigns, online reputation management, and online review platforms.

Together with web development and SEO partners, professional digital marketers help companies update their websites, develop new ones, and maximize their visibility through Search Engine Optimization.

By taking a comprehensive approach to marketing and utilizing data-driven strategies, businesses can improve their market performance and increase their overall success. And any reputable marketing firm knows this. So, when seeking potential agencies, see to it that they are utilizing these efforts and even more.

What are the 4 keys to effective marketing?

The four Ps are the key considerations that must be thoughtfully reviewed and wisely implemented to market a product or service successfully. The four Ps of marketing are the key strategies businesses use to market their products and services.

They are product, price, place, and promotion. The four Ps are often referred to as the marketing mix.

  • Product: The product is the item or service that a business is selling. Ensuring that the product meets the target market’s high-quality needs is vital.
  • Price: The price of the product or service should be set according to the target market and the competition. It should be high enough to cover costs and generate a profit but low enough to remain competitive.
  • Place: Place refers to the distribution of the product or service. Ensuring the product or service is available in the right places and at the correct times is imperative.
  • Promotion: Promotion is the process of communicating the features and benefits of the product or service to the target market. Using the right promotional strategies to reach the target market is important.

Businesses can effectively market their products and services by utilizing the four Ps of marketing. It is vital to ensure that the product meets the target market’s needs, the price is competitive, the product is available in the right places, and the right promotional strategies are used to reach the target market.

How can a company improve its financial stability?

When looking to improve your company’s financial stability, getting help from experts is key. Hiring professionals like financial firms, lenders, and marketers can help you get back on track and ensure your business is in a solid financial position. With their help, you can make sure your company is in the best shape possible for the future.

Finance

Is Being an Accountant Hard?

Being an accountant is not a hard job, but it does require a lot of dedication and attention to detail. To be successful as an accountant, you need to stay organized and keep track of all the finances of your clients or company. Being an accountant is a great career choice if you can do that.

Learning the basics of accounting starts in grade school when kids are taught debits and credits. That is a great foundation, and while most kids forget what they learn in school, the basics do stay with them. Then when they go into a career, they can build on that knowledge. Secondary schools specializing in Math, Science, Social Studies, and Reader’s and Writer’s Workshop courses usually comply with and exceed their state and national content and learning standards, especially in the STEM programs.

While accounting does require a complex set of skills and abilities and excellent attention to detail, it isn’t any more complicated than many of the other popular fields of study that lead to excellent lifelong career opportunities.

But being an accountant isn’t just about numbers. It’s also about understanding how to present them in an understandable and useful way for all the other people working at your company. If you want to be an accountant, you will have to familiarize yourself with computer programs. And even though the job of an accountant is not considered to be an exciting one, if you’re good at what you do and you like it enough, it can become a fruitful, life-long career.

The most common reason people become accountants is for job security and good pay. The demand for accountants is always high, and the job outlook is excellent. According to the Bureau of Labor Statistics, the employment of accountants and auditors is projected to grow 11 percent from 2016 to 2026, faster than the average for all occupations.

In addition, accountants can work in any industry, and there are a wide variety of accounting jobs to choose from. Accountants also have the opportunity to advance their careers by becoming Certified Public Accountants (CPAs), controllers, auditors or managers.

What are some of the advantages in an accounting career?

Benefits of a Career in Accounting

  1. Accountants Have a Better Understanding of Finances
  2. The Growing Demand for Accountants
  3. Opportunities for Advancement
  4. The Pay Range for Accountants is Competitive
  5. The Ability to Start Your Own Business
  6. Gaining a Better Understanding of Taxation and Business Law

Is it worth being an accountant?

Becoming an accountant is worth it if you truly enjoy what it’s about. Of course, you will have to work hard and put a lot of time into training. But, in the end, it’ll all be worth it because you will have been able to provide so much for your career and your company.

  • Accounting allows different professions to work together. Without accountants, no one would know where their money has gone and where it’s supposed to go.
  • Accounting allows people to predict the future of their companies. This helps people take action before it’s too late.
  • Accounting makes it easier for businesses to communicate important information with each other regarding money, services, goods, etc.

Disadvantages of being an accountant

  1. There is a lot of competition. While the need for accountants continues to grow, there are more and more job-seeking accounting graduates.  
  2. Hard work There’s a lot of competition out there.
  3. Long training period
  4. Additional qualifications
  5. Continuing education
  6. Work hours  
  7. Tedious labor includes anything from data entry to reviewing ledgers and preparing financial statements.
  8. Repetitive tasks This is often a con for those who don’t like monotony
  9. Stressful environment Tax season can be pretty intense for accountants, as can audits and other important deadlines.
  10. “Boring” reputation. The stereotypical accountant is dull and doesn’t have much of a social life.

How stressful is accounting?

Stress can result from audit deadlines and the potential fines for false reporting. Because accounting departments don’t produce money, staff reductions are common during economic downturns, creating exhaustion and anxiety for remaining employees. Tax season is particularly stressful for accountants in the United States.

A 2013 survey by Careercast.com found that tax examiner and collector was the most stressful job in America, with an average stress level of 8.95 out of 10.

The second most stressful job was an auditor, with a stress level of 8.54. The survey looked at 11 different factors to determine the rankings, including travel, deadlines, working in the public eye, physical dangers and environmental conditions.

A 2013 survey by Careercast.com found that tax examiner and collector was the most stressful job in America, with an average stress level of 8.95 out of 10.

The second most stressful job was an auditor, with a stress level of 8.54. The survey looked at 11 different factors to determine the rankings, including travel, deadlines, public eye work, physical dangers, and environmental conditions. An auditor is like an accountant but works for a company or organization, running their accounting department, instead of being self-employed.

What is the highest position in accounting?

Controller/Accounting Manager. In companies that do not have a CFO, the controller or accounting manager is usually the highest-ranking accountant. The controller is responsible for the day-to-day accounting of a company.

Will robots replace accountants?

Accountants will be supplemented rather than supplanted by robots. Automation is particularly useful for the kinds of mind-numbingly repetitious tasks that require no degree in accounting or a CPA. Automation allows accountants to spend more time on more important activities and add value.

Automation is utilized throughout many fields, and accounting is no different. In fact, automation in accounting has been around for quite some time now in the form of bookkeeping software. This software has allowed accountants to focus less on menial tasks, such as data entry, and more on analysis and interpretation.

Is Being an Accountant Hard?

So, is accounting a stressful career? The answer is yes. While there are certainly some benefits to the job, such as a regular salary and the chance to work independently, the stress factors can be overwhelming. If you’re considering a career in accounting, be prepared for long hours, intense deadlines, and a lot of pressure.

While being an accountant has its disadvantages, it also has a lot of advantages, such as job security, good pay, and opportunities for advancement. If you’re interested in a career in accounting, research the different types of accounting jobs to see which one is right for you. Being an accountant can also be a very rewarding career in helping businesses and individuals succeed financially.

So, go get an accounting degree from a good school, and you’ll be on your way to a successful career in no time.