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5. 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 inherent transaction risks from a knowledgeable credit person; take inventory of possible credit enhancements your firm can provide; evaluate 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 credit provider, present it first without credit enhancement or with minimum enhancement you think acceptable; of credit enhancements available to your firm, decide which ones will be effective and degree of enhancement necessary to achieve your objectives.
6. It helps to develop a credit enhancement strategy in planning stage of your transaction. Start by understanding transaction’s credit strengths and weaknesses. Decide which enhancements available to your firm will help strengthen risk profile of transaction. Try to assess credit provider’s sensitivity to various types and degrees of credit enhancement. Later, if credit provider turns down your transaction or proposes unacceptable terms, ask provider to suggest enhancements that will make a difference in decision. You may be able to negotiate further, once you have this information.
7. All credit enhancements have a cost. In many instances cost is opportunity cost of not having credit enhancement available for future use. Before offering or providing a credit enhancement, do a thorough cost-benefit analysis to make sure potential benefit is worth cost to your firm.
Though it is not always possible to enhance a credit to satisfaction of credit providers, you should understand value of credit enhancements and know when they may be useful. By carefully considering potential credit enhancements, you can often improve pricing and terms of your firm’s credit transactions. If your firm has a weak credit profile, use of a credit enhancement might make difference between obtaining financing or being rejected.
George Parker is a Director and Executive Vice President of Leasing Technologies International, Inc. (“LTI”). Headquartered in Wilton, CT, LTI is a leasing firm specializing nationally in equipment financing programs for emerging growth and later-stage, venture capital backed companies. More information about LTI is available at: www.ltileasing.com.