Working Capital & Cash Flow Solutions:
Should I Borrow From A Bank?
By
Dave Nighswander,
the President and Founder of Capital Access,
Port Clinton, Ohio, U.S.A.
brettslane[at]yahoo.com
http://www.capitalaxcess.com
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Recently, my newspaper reported that a local bank “...earned
a four star excellence rating for the sixty-fourth consecutive quarter.”
That’s sixteen years of four star excellence! The article went on to say
that the “rating is based on a complex formula that includes …capital
safety levels, quality of loan portfolio, and the ability to meet obligations…”
The press release was designed to showcase the value of this bank and
demonstrate its prominent position in the economy.
As a former banker with over seventeen years of commercial
experience, I chuckle at this information being tossed around by the bank
and its regulatory agencies for self promotion and marketing purposes.
I suppose that if you are a blue-hair whose purpose is to find somewhere
other than under the mattress to keep your retirement funds, this article
was good news. But what does it mean to the business owner or entrepreneur
looking for a Funding partner to participate in an opportunity to grow,
increase jobs and profit? In a nutshell this type of information should
be a wake up call to find another bank-here’s why.
Let’s explore the underlying meaning to business customers
behind a portion of this “complex formula.”
Capital Safety Level
In layman’s terms this means that the bank has more than
adequate reserves of Cash. Cash that is available, but not loaned out
– its Capital Safe. Banks that have high reserves of Capital can be presumed
to be low on the scale of aggressive lending. They hoard Cash - even though
they cannot make the same return on reserved Cash as they can on employed
Cash. But for the bank, it’s less risky to hoard Cash than to loan Cash,
and therefore contributes to their four-star excellence rating.
Quality of Loan Portfolio
A high quality loan portfolio means that the bank’s loan
loss experience is at or above levels set by regulatory agencies. One
can infer that the bank therefore takes fewer risks. Bankers are not supposed
to be entrepreneurial or take risk. A banker has never been rewarded for
taking risk! The banking system rewards those who can decline any borrowing
request outside of the underwriting parameters. Loan portfolio quality
that’s high = low loan accessibility to business owners. It stands to
reason that banks are not risk takers based upon the low returns they
are willing to accept.
Banks with four star excellence ratings seek out commercial
customers who are stable and have limited need to borrow. The other 72%
of business customers are left outside the circle of these banks. Where
do these businesses turn to Cash Flow the Working Capital needs of their
business? Where do they go to fund opportunities for growth and development
of new market niches? More often than not they turn to the widely accepted
world of non-traditional funding sources - preferred SBA lending companies
for real estate and fixed asset needs, leasing companies for equipment
needs, and Factoring companies for Working Capital needs. These non-traditional
funding sources evaluate opportunities to participate by lending funds
to small & medium sized businesses. Non-traditional lenders rates
on borrowed funds may be higher than traditional bank rates, but their
mission is to employ funds to obtain a return, not to let cash sit idle
on the sideline in order to obtain a four star excellence rating. Their
pricing reflects the perceived risk. And, they are not restricted by regulatory
bureaucracy or fear of losing their four star rating as banks are.
In this ever changing world, business owners are advised
to explore opportunities outside of the traditional financing channels.
Before a need arises a business should be familiar with alternative funding
sources. And perhaps, when your bank informs you that they continue to
achieve a four-star excellence rating…it would be wise to investigate
your options pertaining to Working Capital and Cash Flow solutions.
About the Author: Dave
Nighswander is the President and Founder of Capital Access, a
business factoring company specializing in factoring accounts receivables,
working capital, and cash flow solutions for businesses across the country.
For more information on Capital Access, please visit http://www.capitalaxcess.com
or call (419) 732-3174.
Source: www.isnare.com
Published - April 2006
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