Step up your Finance Game: Corporate Risk Management techniques for Entrepreneurs ~ Capitalism

From the Desk of the Editor | 8-PAC

Welcome to the new world of small & micro business finance; where bank’s are taking a markedly different posture on lending money. However, those of you who are seasoned veterans of full economic flow-through have run this gauntlet before (sans 2001) – higher financing costs, choosier lenders, etc.

What makes this credit crunch more severe than the one following the dot-com bubble is the dramatic turnabout from the days of easy access to credit. Prior to 2001, banks had been in credit tightening mode for 9 straight quarters. But prior to 2008, banks had been easing or remaining neutral on commercial loan underwriting for almost four years.

What does this mean to the average small business owner?

Very simply, you must become more sophisticated in your approach to capital risk management. You must ask the simple question, “Do I have enough credit available at reasonable prices to operate my business in the way that I planned”?

The next logical progression in thought is “what insures reasonable prices”? I am glad you asked; in short, you must minimize the risk of nonpayment from those firms that YOU extend credit to.

To this end, the following are a couple pointers (free of charge) that might solidify your current and future finance deal sheets:

  1. Standby letters of credit| this document authorizes a seller (YOU) to withdraw a specified amount of money. Such letters are a secondary payment mechanism; a backup in case the customer fails to pay in accordance with terms.
  2. Collateralized guarantee| use this instrument when your customer has scarce bank funding. However, make sure your collateralized guarantees have claims against business NOT personal assets.
  3. Put Option| you can purchase the right to sell a customer’s debt, exercisable at a specified strike price for a maximum of six months. A bankruptcy filing by the customer is the trigger event. For example, $1 million of coverage would cost you a monthly premium of about 5 percent. The strike price is at a discount to the value of the accounts payable (and is tax deductible). Stay away from those retail accounts receivable discounters, they are a rip-off!
  4. Pre-petition critical vendor agreement| you and a counterparty agree (in writing) that if the counterparty files for bankruptcy, it will petition the court to get the “supplier critical vendor” status. However, keep in mind that bankruptcy courts examine critical-vendor requests much more rigorously now, and there’s no guarantee such status will be approved.

These are only some of the risk management techniques that, if employed properly, will demonstrate to your banker that you are ready to move from the first floor retail desks to the boutique desks on the second floor, and beyond.

Boston Warwick LLC

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3 comments
  1. ilovecash said:

    wow, there’s some great advice here… thanks for sharing 🙂

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