The Bottom Line — Banking on Vision
Banking on Vision
In Lending, Where You're Going is Just as Important as Where You've Been
The five Cs of credit get talked about a lot in business lending. But did you know there’s a sixth C that’s almost as important as the other five Cs combined?
We’ll get to that one in a minute, but let’s quickly review the five most common Cs first:
Character — behavior over time
Capacity — ability to repay
Capital — reserves for the unknown
Collateral — last repayment source
Conditions — economic environment
It’s a necessary and proven approach. You’ve got to show a history of prudent and predictable credit management. But just as important as your credit history, is your credit future – how you’re going to make the money to pay the loan back. This is where the sixth C comes in:
Course — where you’re headed and how you’re going to get there.
Course, plan, direction, vision – whatever you like to call it in your company – are very much a part of any loan decision for us. We like to have a clear picture of your industry, what’s going on in your marketplace, and what your vision is for growth and execution.
We want to discuss and understand your Best Case, Base Case, and Worst Case, because clear-eyed planning is critical for managing risk for everyone involved. Here’s what we mean:
Best Case – What are the ideal resources and conditions required for new client growth, new market expansion, and new business lines. We assume the best economic conditions for Best Case.
Base Case – What are the assumptions and requirements to maintain current business, client relationships, vendor relationships, and margin/expense controls.
Worst Case – This is the plan surrounding client churn and attrition, employee turnover, idle assets, and supply chain interruptions that could lead to losses and possible divestitures.
Each of these cases are best summarized in financial models that project future results, including a detailed review of balance sheet and P&L assumptions. If we invest time to have these discussions and develop these models up front, it usually results in a valuable long-term relationship.
We’ve learned over the years that when we know more, we can help more. We can better anticipate your credit needs. It allows us to better handle bumps in the road together. Most importantly, we can design programs that are tailored to your business, both now and in the future.
Whether you need $2 million or $20 million, our approach is the same: tell us where you’ve been, but also tell us where you’re going.
Paint the big picture for us, help us see it with you, and show us how we can get there – together.
We look forward to the journey.
Watch Brian share his thoughts on commercial banking at Country Club Bank:
— Brian Hoban, Chief Lending Officer, Country Club Bank - Member FDIC
Economic Insights
The GDP Forecast Is Up. Here's Why, and What It Means.
While most of the recent economic news has been around the positive trend in inflation, we thought it appropriate this month to highlight another forward-looking (and positive) piece of the U.S. economic puzzle: real gross domestic product (GDP).
The growth rate of (GDP) measured by the U.S. Bureau of Economic Analysis (BEA) is a key metric of the pace of economic activity and measures the monetary value of final goods and services. For the U.S. economy, that added up to more than $25 trillion in 2022.
The GDP growth (or contraction) rate is a bellwether indicator often used as the defining sign of a recession, something that’s been whispered for months now but has yet to materialize. The definition of a recession most widely used is a sustained period of weak or negative growth in real GDP (typically defined as two consecutive negative quarters) that is accompanied by a significant rise in the unemployment rate.
Thankfully, we’re currently not even close to either one of those factors being true. In fact, the Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2023 is now 5.8 percent, up from previous estimates of 5.0 percent.
Contributing factors include this month’s strong housing starts report from the U.S. Census Bureau and the positive industrial production report from the Federal Reserve Board of Governors. The Atlanta Fed is now forecasting third-quarter real personal consumption expenditures growth and third-quarter real gross private domestic investment growth of 4.8 percent and 11.4 percent, respectively. (Up from 4.4 and 8.8, respectively.)
Bottom Line: Yes, interest rates are likely to rise a bit more this year, as the Fed has already signaled, but the unemployment rate remains resilient, hovering around 3.5%, and inflation has slowed over the past year, currently at 3.2% (4.7% core).
And now, with the bullish GDP predictions, many are saying the other shoe (the recession) doesn’t appear to be dropping anytime soon. While that prediction hasn’t disappeared, it’s certainly been de-emphasized over the last several months.
As most news does, it leaves us with new questions such as will the economy really accelerate in the second half of 2023 as predicted? Will the Fed stick with its current guidance of staying just under 6% on the policy rate? And finally, are the markets prepared for that kind of change?
We’ll be keeping an eye on the answers to these questions and more in the coming months. Stay tuned.
— Marcus Scott, CFA, CFP®, Chief Investment Officer (CIO) for Country Club Trust Company
CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.
Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it authorizes use of by individuals who successfully complete CFP Board's initial and ongoing certification requirements.
The opinions and views expressed herein are those of the author and do not necessarily reflect those of Country Club Trust Company, a division of Country Club Bank, or any affiliate thereof. Information provided is for illustrative and discussion purposes only; should not be considered a recommendation; and is subject to change. Some information provided above may be obtained from outside sources believed to be reliable, but no representation is made as to its accuracy or completeness. Please note that investments involve risk, and that past performance does not guarantee future results.
Lending Alternatives
Demystifying Tax Equity Financing: An Overview of this Alternative Funding Method
When it comes to funding large-scale projects like renewable energy and real estate development, traditional loans sometimes aren’t enough. Tax equity financing can be an attractive and innovative way to secure funds, but the topic can also be intimidating.
We recently spoke with Jeff Judd, President of Investments at Gardner Capital Specialty Group to get the rundown on this growing area of finance and funding. Here's a simple overview to get your arms around the details and better understand how it works and whether it could be an option for your future projects.
Understanding The Basics
Tax credits are often awarded to projects that government entities want to incentivize. And there is a market for those tax credits among those that want to sell their ownership in them, and those that need them to reduce large tax liabilities.
“Imagine you have a project idea, and need the capital to bring it to life,” Judd said. “This is when investors or lending institutions may be interested in buying or financing tax credits, in exchange for a return or more attractive risk profile on a particular loan.”
In tax equity financing, the investors are typically more enticed by tax incentives now, rather than monetary returns later. They’re interested in both but taxes are an immediate liability due every quarter and every year and applying tax credits can free up other capital. Once investors buy the available tax credits, they become partners in a project, sharing both risks and rewards.
How Does It Work?
Project Type. Solar panels and solar farms are currently some of the most popular projects using tax equity financing. Do you own your own building and want to install solar panels to generate your own power and offset utility costs?
The costs involved, from equipment to installation, can be substantial. And tax credits are available for those who qualify. This is where tax equity financing can be an attractive option for augmenting or de-risking a traditional solar energy loan package.
Investor Partnership. Investors interested in investing in your project via tax credits could be large corporations or individuals with a high taxable income. They invest capital into your project by buying your tax credits, becoming equity partners.
The Tax Credits. Government entities offer tax incentives to promote certain industries like renewable energy and affordable housing. These incentives allow investors to offset a portion of their tax liability. Essentially, they get to pay fewer taxes because they're contributing to a project that aligns with the government's goals.
Project Returns. While the investors benefit from tax incentives, project owners can generate returns from a project's income, whether it's selling solar energy, leasing property, or any other venture. These returns are shared among project owners and investors.
Exit Strategy for Investors. Tax equity financing partnerships typically have a set term, often coinciding with the period during which tax incentives apply. Once this period ends, outside investors can be bought out. That’s not a requirement, though, as there is often significant value remaining in the original project that can be captured for many years to come.
Advantages and Considerations for Tax Credit Funded Projects
Advantages:
- Reduced Debt Accumulation: Unlike loans, you're not accumulating debt. The funds provided are investments, and you're not obligated to make regular payments.
- Risk Sharing: Investors share the project risks with you. If the project doesn't perform as expected, they also shoulder part of the setback.
- Access to Expertise: Involving investors could mean gaining access to their expertise and industry connections.
Considerations:
- Complexity: Tax equity financing deals can be intricate due to legal and financial factors. Professional assistance might be required.
- Loss of Full Control: While you share the rewards, you're also sharing decision-making power with the investors.
- Eligibility: Not all projects qualify for tax incentives, and not all investors are interested in this type of arrangement.
Tax equity financing offers an alternative way to fund projects by tapping into tax incentives. This mutually beneficial arrangement allows investors to reduce their tax burden while providing developers and owners with the capital needed to turn renewable energy, affordable housing and many other projects into reality.
By understanding the basics of tax equity financing, you can unlock new avenues of funding and take steps toward bringing ambitious projects to fruition. Get in touch with your Country Club Bank commercial banker or Gardner Capital Specialty Group to discuss the feasibility of tax equity financing for your next real estate development, renewable energy installation, or other capital improvement.
M&A Insights
What To Do If You Are Approached with an Unsolicited Offer for Your Business
Have you been approached with an unsolicited offer on your business? That may be a welcome inquiry, but it’s got to be handled correctly to maximize the opportunity from the very beginning.
With increased competition, more buyers are reaching out to potential acquisition targets directly in hopes of bypassing a competitive auction process. So how does an advisor respond when clients ask: “What should I do? Do the terms and value presented reflect current market conditions? Is the group behind the letter the best buyer?”
CC Capital Advisors has advised clients on 100+ mergers & acquisitions, capital raising, and strategic advisory transactions totaling over $2.5 billion. Read the invaluable nuggets gleaned from years of counseling sellers when it comes to unsolicited offers. Learn more about the compelling strategic insights that can benefit anyone seeking to optimize the sale of their business.
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