Finance Blog BFA, Banks and Risk Tolerance
BFA, Banks and Risk Tolerance
Written by Larry Johnson Sunday, 01 November 2009 19:00
How does BFA differ from the banks vis--vis risk tolerance? For starters, banks are traditionally risk adverse. Banks will not often lend where their risk assessment of the project would require a rate of more than prime plus 2%. Consequently, their criterion for what constitutes a good lending risk is narrow and often restrictive.
The cost of money varies with the risk assessment of the project. Higher risk results in higher rates. BFA has built relationships with many risk-tolerant asset-based credit facilities and can negotiate optimum rates.
Banks require a 125% debt coverage ratio (DCR) minimum. BFA typically also requires the same coverage. But BFA will also take into consideration the companys growth potential and how this will affect the companys DCR.
In terms of collateral, banks will ask for a General Services Agreement (GSA) on ALL the assets of a company. BFA asks for the first position on the specific collateral that we are financing. This allows clients to free up collateral for future financing, as long as their DCR allows.
Banks are first and foremost a cash flow lender. Their priority is the DCR first and then the collateral. BFA examines both assets and cash. BFA can often arrange financing if cash flow is tight, but the DCR trend line is up.
BFA complements the banks by taking on higher risk projects, recognizing, more assets, a higher loan to value ratio and not requiring as much collateral.