The sustainability of any business hangs on many factors and the most important is the funds. So much revolves around funds availability for the uninterrupted running of any business, but sadly this much-needed funds may sometimes become impossible to come by resulting in business owners seeking for alternative means of getting at the funds. This is the point where lending companies become an attractive choice and succor for a way with business funds.
But then, this attractive succor could give a “leach effect” on the business if measures are not taken for the benefit of both parties. The business owner will always be bothered with the interest expected of him/her and at the end, the business may be repairing more than it anticipated which may not be healthy for the financial strength of the business. One of the ways of getting it easy with lenders is through credit enhancement, a means of getting your investors confident of their investment, reducing the cost of borrowing and making your company eligible for more credits.
How is credit enhancement done?
When you provide additional collateral to the investing organization/person.
When you get insurance guaranteeing payment for the investors.
When you get a third-party guarantee
However, there are certain pieces of information about credit enhancement that will be beneficial to your business, like some ways credit enhancement can work for your business.
Over-collateralization. Most times, having collateral is not a guarantee that the investor can get back the exact percentage of the funds invested as a result of fluctuations in the market. Over-collateralization requires that the amount of the collateral be more than the loan so that in the event of a crash in price or the borrower’s failure to keep up with the promise, the lender can recover back his/her investment without losses. With this assurance, the lender will gladly agree to the terms of the credit enhancement.
Credit wrapping. Remember that some of the ways of getting credit enhancement are by offering your company’s insurance guarantee to the lender. What happens here is that the insurance company tries its best to improve the ratings of bonds, with premium from issuing companies they give insurance to investors. And they also promise to pay the investor if the borrowing business owner defaults. By this action, the confidence of the investor is increased and the cost of loan reduced as they agree to credit enhancement.
Bank guarantees. When investors find it hard trusting the assurance from issuing companies, bank guarantees are the backs to fall on. Being an integrity conscious institution, investors are ready to go with any term/conditions offered here. Even when the bank may sometimes give a partial guarantee, it is still safe and will increase your business chances of securing a credit enhancement.
Surety bonds. If your assets are backed by securities, surety bonds will agree to pay because it is designed to work as an insurance policy in the protection against losses. Their intentions are to lower the possible risk of asset-backed securities thus making them lovable to investors. Usually, surety bonds are issued by banks and other financial institutions.
For business owners, any avenue by which debts and interest rates can be reduced is a golden opportunity any time and that is the gift in credit enhancement. But the best part of it is in getting familiar with some of the ways around it for a smooth business relationship with all stakeholders.