Commercial Banking 101
Monday, 18 November 2019
Entrepreneurs walking into a bank for the first time can feel overwhelmed and filled with questions.
While they may have experiences with personal banking—i.e. dealing with savings and checking accounts—commercial banking is a completely different animal, and it pays to do one's homework prior to scheduling a meeting.
Lynne Herndon, Executive Vice President for the Commercial Banking segment at BBVA, offers three pieces of advice for those approaching a bank for the first time.
- Be able to clearly articulate your story. “Explain how you started the business, introduce the management team and describe how you are planning to grow your company," she says.
- Describe in detail how you've overcome a problem. If you've experienced a downturn of any kind, know that the banker will find it (even if you fail to tell them), so be open and explain how you've overcome a significant challenge.
- Bring your finance person to the bank meeting, and consider getting an audit before the sit-down. “If you're able to afford the services of a CPA, do it," Herndon recommends. “We like to see quality financial statements."
Glossary of Commercial Banking terms
Pre-meeting preparation also means understanding common commercial banking terms. Here are a few important phrases to know, with Herndon's own definitions, broken out into two distinct categories.
Cash flow: Cash flow demonstrates how much cash is left (after operations costs) to pay for debt service. “A simple definition," says Herndon, “would be to take your net income, plus depreciation, plus interest, then divide by interest, plus your principal."
Leverage: Leverage is the ratio of debt vs. equity on a company's balance sheet.
Asset-based lending: Asset-based lending is the type of lending where the amount a company can borrow is based on its eligible collateral. “Usually, its accounts receivable and inventory, after applying an appropriate advance rate," she says. “Around 70-80 percent on accounts receivable and 30 to 50 percent on inventory."
Debt capital: Debt capital is defined by an amount of money used by companies to fund assets with either debt or equity. For example, a loan is referred to as debt capital.
Accruals: Accruals is a GAAP, or generally accepted accounting principle, term often used to record when revenues and expenses are incurred, not only when they are paid.
Clear period: “Seasonal lines of credit often have clear period requirements," says Herndon. “This means that in the off-season, the line of credit must be paid down to 0 for a stated period of time."
Borrowing base: Asset-based lending (see definition above) lines of credit are governed by borrowing bases. “This is the amount determined after accounts receivable and inventory are margined with a stated advance rate," she explains.
Standby letter of credit: This letter is a guarantee of payment issued by the bank on behalf of a client, should the client fail to pay a third party.
Maturity date: A maturity date is the date on which a loan is due in full.
Guarantee: “Owners of companies are commonly asked to personally guarantee the debt of the company they own as an additional source of repayment," notes Herndon.
Treasury management terms:
ACH: ACH stands for Automated Clearing House, the electronic clearinghouse for U.S.- based financial transactions (and how many companies describe direct deposit).
Disbursement: The term for sending money.
ZBA: “ZBA means zero balance account," says Herndon. “This is a checking account that ends the day with a zero balance, either by drawing on funds to pay all checks and/or paying down a line of credit with excess cash."
Commercial card: This is a method of payment used by companies to pay vendors.
Cash concentration: “Cash concentration is a service that allows companies to electronically pull out all the cash from accounts in multiple locations into one account," she says.
EFT: EFT means electronic funds transfer, which is the transfer of money from one bank account to another, either within one bank or among several banks.
Positive pay: “Positive pay is an automatic fraud protection tool whereby banks match the checks a company issues with the checks presented for payment," she says.
Sweep account: This is an account that automatically transfers cash that exceeds a minimum balance to a higher earning account to pay down a line of credit.
Remote deposit: Remote deposit is a system that allows customers to scan checks remotely and transmit a check image to a bank for deposit," Herndon says.
Pre-authorized debits: Pre-authorized debits are automatic bill payments at predetermined times.
Need more information? Check out the Federal Reserve's National Information Center.
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