Harmony with Your Creditors

There are essentially three categories of creditors for a business entity – suppliers offering trade credit, individual lenders (banks, finance companies, wealthy individuals, sometimes its own shareholders) and bondholders. I covered trade credit in the previous section on suppliers (see above) and I will cover your bondholders in the section on financial markets below.

In this section, I will focus on your individual lenders. What you want from your lender in terms of financial value, is obvious. You want to receive the loan that will make it possible for you to execute a corporate project that will create a substantial amount of financial value for your shareholders.

And to get this loan on the terms (size, duration, payment schedule, amount of payments, real interest rate, etc.) that will optimize your KPI for your project: minimize breakeven point and payback period and maximize NPV, IRR/MIRR and economic profit. Obviously you make sure that this is, indeed, the case. Which requires a solid and accurate financial model developed by a competent and experienced analyst.

Desired functional value is also quite obvious. First and foremost, you want to execute the project to create something useful (functionally valuable) for your company. Manufacturing equipment, ERP software, new fleet of trucks, etc.

Second, lenders often offer valuable advice on various aspects of corporate financial management. Valuable for both sides – for you this advice can make a noticeable amount of money (usually by saving it); for your lender it will decrease their lending risk.

As for emotional value, you would want to be treated well by your lenders and in general enjoy the experience of working with them. Believe it or not, some of them can actually be quite nice.

Now what you can do for your lenders. First and foremost, make money for them by paying interest and repaying the principal. This is financial value. In terms of functional value, you create it by doing what your lender wants you to do.

Mostly it is (1) supplying the lender – on a timely basis - with all accurate and up-to-date information needed to monitor your project and the loan and (2) consult the lender before making and executing major decisions that may have a significant impact on your project and thus the loan.

In terms of emotional value, your lender wants you to make him (or her) emotionally comfortable and to generally treat him/her well. The first is taken care of by transparency created by the project information you send to your lender; the second requires an efficient communications campaign.