Managing C&I Credits With IndustriusCFO
If your commercial lending department is accustomed to managing a lot of commercial real estate loans, then working with C&I businesses can feel like a whole different animal. There are a lot more variables that can affect debt repayment, and digging into the financials can be a bit overwhelming.
Here’s a powerful tool we think you’ll find very helpful.
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As part of our C&I series, we’ve been reviewing tools for managing C&I credits. Previously, we looked at an SBA loan performance database that’s a useful reference at the start of your loan. Now, let’s explore a more robust tool you can use to monitor credits throughout the life of the loan.
IndustriusCFO is a financial analysis tool that provides a picture of a business’ financial health, and also how its performance compares against others in its field. It allows a user to conduct various types of detailed analysis such as a business scorecard, the probability of loan repayment, liquidity position, profitability performance and valuation reports. After entering a business’ specific financial information (like a tax return or financial statement), IndustriusCFO draws information about others in that field from a proprietary database of financial information on privately-held companies. I find it very useful for helping lenders evaluate and monitor C&I business customers much more effectively.
Often, it is not until a business becomes chronically late on payments that a lender is triggered to look into the situation. Then, traditional markers like debt service coverage, leverage, and current ratio are assessed. These are measures that translate to banking, but aren’t necessarily meaningful in the day-to-day of operation a business.
If you truly want to help your customer perform better, you’ll need to be willing to look at things through a business executive’s lens. Let’s use the example of “Anytown Manufacturer,” who is chronically hitting your past-due list. When you first secured Anytown as a customer, they had just landed a large new client that should have propelled its sales volume forward and helped to solve seasonality issues. But, as it turns out, Anytown wasn’t efficient enough to meet the needs of its large new customer, and over time, couldn’t translate the increased business into profitability. Now your existing customer is at a critical juncture and needs guidance. How can you help the company without loaning him additional money right now?
Entering Anytown Manufacturer's tax return will produce an analysis of its performance compared to other companies in the same industry. Industrius allows me to drill down into several areas of liquidity. Within the net balance position, I can look at age of inventory, collection period, payment deferral period, and cash conversion cycle. Overall, the net balance position is positive, but Anytown needs to improve collection of receivables.
Anytown Manufacturer is 17 days slower in collecting payments from its customers than average peers. They currently have $120,000 tied up in receivables because their customers are paying them too slowly. Changing that one variable and encouraging them to implement better internal practices for collecting payments can quickly quadruple the amount of working capital available for short-term operations. That is really the only short-term issue in need of immediate attention.
Under long-term liquidity, their return on asset investment puts them in the bottom 4% of all companies in that NAICS code. This can be symptomatic of issues such as incorrect product pricing, sourcing product materials that are more expensive that your pricing model has captured, or underutilized, inefficient labor.
Your role as the lender is just to point out potential areas for improvement – not to prescribe exactly what measures to take. For long-term liquidity issues, the business might very well need outside help in the form of process experts and/or cost accounting. This can help your customer see more clearly the specific sources causing stress in return on investment.
IndustriusCFO is a robust and complex tool, and I’ve just shown a small sliver of how it can be used. But, I hope this example has demonstrated how valuable it can be for managing C&I credits and helping customers at the earliest signs of stress. Getting involved early can save you and the business a lot of headache and heartache down the road. As the saying goes, “an ounce of prevention is worth a pound of cure.”
If you see the value in a tool like IndustriusCFO, but are short on time to train and use it – then just ask VITAL for help. We are experts in financing C&I businesses, and are already equipped with the tools and resources you need to ensure loans are done right, every time. Learn more about VITAL at www.vitalfs.com.