Growth constraints and interest rates

Most people believe that one should never accept high interest rates on money borrowed. If you think this is always the answer, then you might want to read on and think again.

Yes, it is prudent to get the lowest rate possible when you can get the funds that you need to fulfill your plan. BUT, and that is a very big BUT! Consider the case where one can grow beyond self imposed growth limitations.

I’ll start my case discussion with a couple of concepts: controllable growth, lending constraints, value received and contribution margin.

Controllable growth will be different for every company, largely because of differing strength of management, resources, and processes. Nothing in this blog means to suggest that any company should grow faster than the rate that they can control. Nevertheless, I have found that many companies do have the ability to grow but are constrained by a lack vision and of capital. Typically, their management is focused on “not paying taxes”, or avoiding interest expense at all costs. Their shortsightedness is their true constraint.

As we look at lending constraints, let’s look at standard bank financing first. Banks are valuable lending entities that tend to have comparably low rates. Their acceptable risk profile is usually limited by five components, the company’s leverage and their historical ability to service term debt. Primary source of repayment must be also supported by a good back-up plan, or secondary source of repayment, followed by the payment history of those involved. The bottom line is that many businesses can only obtain enough bank credit to traverse a slow growth curve. In many cases this is the wise path. Though, there are many cases where a given company’s management wants to grow faster than they can with limited availability of credit. It is those instances that I’m focusing on here.

It is easy for a business owner to think of financers as just a conduit for money. Many also believe that loans are a commodity. My meaning here is that they think all loans with the same interest rate are the same. Conversely, I have found that initial loan conditions plus banker’s flexibility and patience toward variations in business plan implementation are differentiators. Also financers can add value through their connections, knowledge & experience, and direction. It is important to understand all of the benefits you receive when dealing with a particular financer.

Contribution margin is a concept that deserves its own blog. One can Google the subject and be blasted by charts and graphs and heavy “accounting speak”. It is truly appropriate for all business owners to fully understand contribution margin, so read as much as you can. The quick explanation is that contribution margin is the profit value of an incremental dollar’s increase in sales. This is important because it enables management to make valuable decisions about when to continue to grow and when enough is enough. One more thing about contribution margin is that you do not calculate it by looking at your net profit percentage. You just look at costs that vary with sales. Fixed costs or overhead remains constant, therefore additional sales yield more profit than just the historical net profit percentage.

Let’s say you have outstretched your growth based on borrowing availability at cheap lending rates, yet more money is available at higher rates. Let’s also say that the higher rates still allow for growth and increased profits. Then why would you choose to miss the opportunity just because you are overly focused on the wrong thing?

Indeed, many businesses make the shortsighted mistake of bridling their growth just to avoid taxes or get the lowest interest rate. Cheaper isn’t always better. Conditions, flexibility, customer service, and the ability to achieve your goals are all worthy of consideration.

Feel free to give me a call and I’d be happy to talk with you about what is constraining your growth and ways to overcome roadblocks to success.

 Bob Stackhouse, President, Asset Commercial Credit © Bob Stackhouse – All rights reserved – December 2013

Taking the mystery out of commercial lending

Have you ever wondered why one company gets an unsecured line of credit, another company’s credit facility is secured by all assets, and still others are declined entirely for commercial credit?

The equation is both complicated and simple at the same time. “What were the odds?” as my esteemed colleague, author and friend Larry Mandelberg would say.

Let’s start with simplicity. The simple version answers the mystery of commercial financing. The complex version speaks to the nuances between how various lenders, regulators, and risk managers see a credit request. I’ll deal with the complex version in another blog entry.

Basically, it is a risk – reward equation measured by leverage. It is not the lender’s prediction of whether or not you are going to fail. Consider the following:

  • Banks typically earn 1-3% interest on their commercial loans after paying their overhead and cost of funds. If a borrower defaults on a loan, the bank must make 33-99 loans to earn back their lost principal. Banks need to make solid loans that contain minimal risk. They do this by looking first at leverage.
  • Business owners inject equity into their business. They risk loosing all of their equity if the business fails. However their upside is that they reap profits that give them a potential very high rate of return. In some cases, business owners yield thousands of percent returns on their investment.
  • Commercial finance companies will make loans when banks will not. These finance companies’ monitoring expenses[1] might be ten times that of the banks’ expenses. This is because the banks generally do not make loans when heavy monitoring is needed (some do in specialty groups that mirror  commercial finance companies). Money borrowed from finance companies is substantially more expensive than banks. If a default occurs, the finance company need only make 3-10 loans to make up the lost principal.

[1] In order to actually collect on accounts receivable in a default situation, the lender must know who is owed, have their contact information and preferably be in a position for the accounts to be sending their payments directly to the lender. Without heavy monitoring, it is not practical for a lender to gather this information at the last minute when a borrower is in default.

  • Venture capital invests and takes ownership in the company. If the company succeeds, they may reap hundreds of percent returns on their investment. Venture capitalists are willing to take significantly more risk than other types of financiers. They may even lose money on 10 deals as long as they score big on one.

It all comes down to leverage and who has the most to lose. Leverage is easily discerned by the company’s debt to worth ratio. Different industries have different typical debt to worth ratios and are weighed unique to each industry’s norms.

From a general perspective a 1:1 debt to worth ratio means that the business owner’s equity equals the company’s debt. It also means that there are enough assets (at cost) to cover the debt. The equity provides a cushion for something that might go wrong in the future. Banks tend to have minimal conditions when lending to companies that have debt to worth ratios at or under 1:1.

Some companies are more leveraged. Perhaps their debt to worth ratio is closer to 1.5:1. These companies will typically be financed with secured lines of credit or secured term loans. As one approaches a 2:1 debt to worth, credit facilities become heavily conditioned and collateral is monitored to some extent. Some special industries may obtain financing at higher leverage ratios, but the ratios must be under the norm for that industry.

So there you have it. Leverage is the key determinate. Though do not get me wrong … there is a more complex version that all financers use to evaluate total risk and suitability for inclusion in their loan portfolio. Included are: debt service, competition, industry, payment history, outlook, assessment of management, age of business, etc.

 Bob Stackhouse, President, Asset Commercial Credit © Bob Stackhouse – All rights reserved – October 2013

Feel free to give us a call to discuss which category of financeer is appropriate for your business.


These are quite possibly the most misunderstood organizational development components around. Many business owners hear that they are important, but they don’t really know why. They read a little, or remember a course or rely on an employee’s education when they were discussed.

Let’s start with the questions … what are they & why are they important?

A mission statement is a quick outwardly focused statement about what the company does, how they help people, or the purpose of the company. Basically it states why the company exists. It should be as short as possible, clear and focused. Many people try to load the statement with jargon, vision and values because they think it is more sophisticated. They also tend to create a list of all of the products or services that the company does. Avoid all of this! A clear mission is useful in talking with customers, prospects and reduces internal conflict. All employees should have the mission memorized. Once this happens synergy can happen inside the organization.

Values (Statements of Values) are more important and even more misunderstood. First, I’ll start with the “why”. A Statement of Values serves as a foundation for all company decisions. Clearly one can not write procedures for everything. Individuals will have to make many decisions on the fly during the course of operating the business. I like to tell my clients that they do not want to create Enron Values. You might remember that Enron created very nice sounding values, yet their corporate decisions were routinely inconsistent with the values. The process of creating a Statement of Values is almost always more efficient by using a professional facilitator. Otherwise the tendency is to create items that sound good, but are not truly the company’s values. The Statement should focus on 5-7 core statements that are easy to remember.  All employees should be able to recite the values (at least in paraphrased form). Management should integrate the Statement of Values into the orderly running of the business.

Vision is a statement of where the company is going, what management wants to accomplish, or what success looks like. Varying complexities can be acceptable, however all employees should understand it. Performance plans should focus on it. Bonus programs should be designed to accomplish it. “Lofty” is good; however the vision must be seen as possible by the employees. President Kennedy’s vision was to put a man on the moon by the end of the decade. Short can be good in that it is easy to remember. It has been said that Pepsi’s vision was to Beat Coke. However the vision needs to be specific enough to bring the employees together for a specific purpose.

Once you create these items and focus your organization, you will be amazed at what petty issues disappear. If you have a strong buy into mission, values and vision, and are still having problems, the next step is to examine the structure or guidance that is imbedded into processes and procedures. This will be the subject of another blog entry.

Bob Stackhouse, President, Asset Commercial Credit

© Bob Stackhouse – All rights reserved – August 2013

I always suggest the use of an outside professional facilitator to help management with these organizational development objectives. A facilitator can extract ideas and concepts out of key employees, gaining their buy-in. It is a little bit like teaching youth to drive. The quickest and least aggravating experience is to use a driver’s education professional. Children tend to respond differently to a trainer than their parents.

Feel free to contact me about referrals to a Certified Professional Facilitator that is near you.


  • Have you ever jumped into a situation where you fixed a problem, only to find that everyone relies upon you to continually perform a task?
  • Do you know people who continually perform inefficiently or in ways that are hurtful to themselves, yet they resist solutions.

New managers will often jump right in, see a problem and fix it. Quick action and stopping a problem from festering is their focus. Indeed, this does make sense some of the time. Conversely, seasoned managers will often look at a problem and dissect it to the root causes of the problem. Then a solution can be designed that when implemented, the problem solves itself. I like to think of this as being a catalyst.

I’ll start with an example of a volunteer organization. It could be a charitable cause, a religious institution, community event or even a school’s parent organization. I’d be surprised if you have not seen instances where a volunteer will solve problem after problem, only to find that they are doing all the work. They tend to get frustrated, burning themselves out. Once they quit, others step in. They are perplexed as to why they never received help when they wanted it.

Let’s examine this scenario. Why does the volunteer jump in with both feet, putting them self at the heart of every need or crises? Typically, their activity starts innocently. They have a talent or skill that is needed to solve a problem. They jump in and solve it themselves because it is quicker to do so. Task completion strokes their ego in addition to their feeling needed. They get a feeling of control and power. It feels good. Let’s face it, everyone needs some degree of control in their lives. Sometimes the “control” gets out of hand.

Why can’t they get help when they need it? Often, others could have participated in the solution, but space was not made to accommodate them. Sometimes other volunteers even show up to help. If no action, guidance, coordination or structure is available, they often feel unneeded or un-empowered to help. The other volunteers shift their efforts to other projects thereby leaving the original volunteer alone, doing all the work … alone.

The solution is to fully include others, empowering them and sharing the control from the start. So what is another example of being a catalyst? Let’s say that a given company is under-performing, employees argue, there is no sense of teamwork, and high turnover is the pattern. If you have another example in mind, feel free to picture it instead. So, we are looking at a company with a problem. The first thing to look at is not trying to understand what people are fighting about, or who is at the center of controversy. Clearly, you will end up there, but that is not the first place to look. Basically people tend to fight when certain organizational development steps are absent.

The first three things to look at are Mission, Values and Vision followed by structure. I’ll be writing about these items in subsequent blogs, so keep an eye out. In short, employees and customers need to clearly understand what the company does and how they fit into the mix. They need to understand the core rules that decisions must be consistent with. They need to understand the path to success for both themselves and the company. Many companies have done work in this area without truly understanding the significance. Their employees and efficiency suffer needlessly. Remember to try to understand the root cause of problems and ask yourself: Is there something that I can do so the problem or situation solves itself?

Bob Stackhouse

President Asset Commercial Credit

© Bob Stackhouse – All rights reserved – July 2013

Whether you are in management or just trying to solve problems in your local church, it pays to understand human behavior and advanced methods to solve problems. It also pays to have a coach as you develop your managerial skills. Think about it. Even the most talented sports athletes, journalists and talented actors have coaches, mentors, and directors. Why not managers too? The answer is that the best managers use coaches, mentors and confidants as well. Coaches can help you discern which problems need to be worked with which methodologies. Give me a call if you are looking for one. I am connected to a large number of coaches that belong to The Institute of Management Consultants. This is an organization that drives ethics in the industry.