The mutual friend was concerned because the business owner was assigned to a work out specialist at the bank. In addition, the owner was behind in payments to other creditors, including the building owner, suppliers and an equipment leasing company.
I agreed that a discreet and trustworthy advisor could shed light on the situation.
COULD THIS BUSINESS BE SAVED?
The mutual friend wondered, could the company be sold for a price high enough to cover all the debt?
My first question was about the timeline: “If we can slash costs, boost sales, improve the bottom line and position his company to sell within six months to a strategic investor or competitor, will the bank agree to wait?”
The mutual friend hedged.
There were contributing factors that were much worse than the owner’s family was aware, he explained. He was not sure of the extent and gravity of the situation, but he thought the bank would not agree to a postponement.
As I discovered in a phone call with the owner, this was not the first time there were repayment issues with the bank.
The owner admitted he had a spotty history. He often ignored credit card payments and loan payments for months, only to follow up with large, irregular payments. He used the business checking account for undocumented personal expenses. He habitually applied for new credit cards so he could pay off old balances and “start with a clean slate.”
Nothing was illegal, just sloppy and unbusinesslike.
Then I asked him about the status of his work out plan. He was evasive at first, then defensive. He had not kept in contact with his designated liaison nor had he “gotten around” to providing the requested paperwork. Important deadlines had passed.
THE SIX C’S OF CREDIT AND LENDING
Work out specialists and lenders are taught that a borrower’s character correlates to his or her credit worthiness.
In fact, financial institutions weigh six factors they call the “6 C’s” when they evaluate our likelihood of repaying a loan. Taken as a whole, the six C’s help financial institutions estimate their level of risk with potential borrowers.
This is an excerpt from a SCORE article entitled “The 6 C’s of Business Credit”:
1. Character – This is a highly subjective evaluation of the business owner’s personal history. Lenders have to believe that a business owner is a reliable individual who can be depended on to repay the loan. Background characteristics, such as personal credit history, education and work experience are all factors in this business credit analysis. Character is the single most important factor considered by a reputable bank. Banks want to do business with people who are honest, ethical and fair.
2. Capacity – This is an evaluation of the company’s ability to repay the loan. The bank needs to know how you will repay the funds before it will approve your loan. Capacity is evaluated by several components, including cash flow, payment history and contingent sources for repayment.
3. Capital – A company’s owner must have his/her own funds invested in the company before a financial institution will be willing to risk their investment. Capital is the owner’s personal investment in his/her business, which could be lost if the business fails.
4. Collateral – Machinery, accounts receivable, inventory and other business assets that can be sold if a borrower fails to repay the loan are considered collateral.
5. Conditions – Economic conditions specific to the industry of the business applying for the loan, as well as the overall state of the country’s economy, factor heavily into a decision to approve a loan.
6. Confidence – A successful borrower instills confidence in the lender by addressing all of the lender’s concerns on the other Five C’s. Their loan application sends the message that the company is professional, with an honest reputation, a good credit history, reasonable financial statements, good capitalization and adequate collateral.
AN OWNER’S CHARACTER REVEALED
In my book, the owner already had a big red X next to the first “C.” Character. Or, more precisely, lack of character.
In our conversation, he had revealed:
- A HISTORY of making lazy financial decisions.
- AN ATTITUDE of reluctance to repay, even when he had the ability.
- A WEAKNESS in paying personal expenses before honoring business agreements.
- A HABIT of ignoring an obligation when money was tight, rather than communicating proactively or making arrangements.
- AN UNWILLINGNESS to be uncomfortable financially or make a sacrifice for the sake of the business.
He would not face that his business was going under. And he certainly was not going to take any responsibility.
WHEN TIME MATTERS, CHARACTER COUNTS
I bet you do know an owner like this. We all do.
Business owners in every industry, not just our own, can be too proud to ask for help until the end. Sometimes they are owners of strong character who can’t handle the truth. Sometimes they are owners who have succumbed to selfishness and greed, bitter and long standing family arguments, hunger for power, and immediate gratification.
Any work out specialist will tell you: The way that people make and keep promises over the course of their lifetime is unlikely to change, even if they are given a six-month extension.
So my question is this:
If your company had six months to turn itself around, what would those around you say?
Save? Don’t save?
Whether you have six months or 60 years to run your business, your character is key.
*The process by which credit is granted is governed by laws administered by the Federal Trade Commission that guarantee nondiscrimination and other benefits. These laws include the Equal Credit Opportunity Act, Fair Credit Reporting Act, Truth in Lending Act, Fair Debt Collection Practices Act, and Fair and Accurate Credit Transactions Act.
For 35 years, Rock LaManna has helped label and graphics company owners make better decisions. If you are ready to sell your business or improve your bottom line, integrity matters! Email Rock@RockLaManna.com for a confidential discussion about services available from the LaManna Alliance.