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Credit Enhancements: Seven Tips For Enhancing Busi

Credit Enhancements: Seven Tips For Enhancing Business Credit Transactions by: George A. Parker What are the avenues available to businesses with weak credit profiles or to companies pursuing credit transactions that are perceived as too risky by credit providers? Many companies apply for credit at banks, finance companies or equipment leasing firms and are routinely rejected due to the high degree of perceived credit risks.
When approaching a credit provider, it is helpful to understand what can be done to reduce the risk of a credit transaction in the eyes of the provider.
Never accept a credit rejection without considering credit enhancements. Here are a few tips on credit enhancement to help guide you in approaching the credit process: Credit enhancements are modifications to credit transactions that improve the risk-reward relationship for credit providers.
Enhancements can be real or merely perceived by the receiving party.

Also, they can be tangible things like real estate and equipment or they can be intangibles like future rights or options.
Use credit enhancements to strengthen credit transactions and to improve pricing or terms.

They may be used to entice credit providers to approve credit transactions that would otherwise be unacceptable because of the perceived risks. They can also encourage credit providers to make transaction approvals faster. Credit enhancements usually fall within one of these general categories: improvement in credit terms favoring the credit provider; additional collateral; guarantees, insurance or third party assurances; increased pricing, compensation or upside gain potential; or granting of specific rights or options.

Some specific enhancements include: granting a security interest in additional equipment, real estate, inventory, accounts receivable, intellectual property rights or other company assets; pledging cash; pledging securities; third party guarantees; surety bonds; letters of credit; pledging cash value of insurance; increase in transaction rate; additional fees or other transaction compensation; shortening the term of certain transactions; granting first refusal rights on future transactions; permitting call options; obtaining re-marketing guarantees or agreements. When considering using credit enhancements to improve your transactions, use these guidelines: try to get a fair and objective assessment of your credit profile and the inherent transaction risks from a knowledgeable credit person; take inventory of the possible credit enhancements your firm can provide; evaluate the cost of possible enhancements to decide whether using them will be worthwhile; if there is time and opportunity for a second chance to present your transaction to the credit provider, present it first without the credit enhancement or with the minimum enhancement you think acceptable; of the credit enhancements available to your firm, decide which ones will be effective and the degree of enhancement necessary to achieve your objectives.

It helps to develop a credit enhancement strategy in the planning stage of your transaction.
Start by understanding the transactions credit strengths and weaknesses.
Decide which enhancements available to your firm will help strengthen the risk profile of the transaction. Try to assess the credit providers sensitivity to various types and degrees of credit enhancement.

Later, if the credit provider turns down your transaction or proposes unacceptable terms, ask the provider to suggest enhancements that will make a difference in the decision. You may be able to negotiate further, once you have this information.
All credit enhancements have a cost.


In many instances the cost is the opportunity cost of not having the credit enhancement available for future use. Before offering or providing a credit enhancement, do a thorough cost-benefit analysis to make sure the potential benefit is worth the cost to your firm. Though it is not always possible to enhance a credit to the satisfaction of credit providers, you should understand the value of credit enhancements and know when they may be useful.

By carefully considering potential credit enhancements, you can often improve the pricing and terms of your firms credit transactions. If your firm has a weak credit profile, use of a credit enhancement might make the difference between obtaining financing or being rejected. About The Author George Parker is a Director and Executive Vice President of Leasing Technologies International, Inc.

(LTI), responsible for LTIs marketing and financing efforts.

A co-founder of LTI, Mr. Parker has been involved in secured lending and equipment financing for over twenty years.
Mr. Parker is an industry leader, frequent panelist and author of several articles pertaining to equipment financing.
Headquartered in Wilton, CT, LTI is a leasing firm specializing nationally in direct equipment financing and vendor leasing programs for emerging growth and later-stage, venture capital backed companies. More information about LTI is available at: www.
ltileasing.

com.
gpmail129-groups@yahoo.com This article was posted on February 15, 2005 .