Cash Flow and the 5Cs of Credit - Collateral

The 5Cs of Credit consist of Character, Capital, Capacity, Collateral, and Conditions.

D. Brown Management Profile Picture
Share

The 4th of the 5Cs of Credit is how much and what type of collateral the contractor will put up as a guarantee.  

Cash Flow: 5Cs of Credit. Collateral.

When the underwriting requirements are relatively small, this is often done like a personal credit card. Very quickly, however, the collateral requirements will increase.  

For specific purpose financing, such as for a piece of equipment, building, or land, the collateral is often just the title for what is being financed. The amount of capital or down payment that is put into the deal is what the contractor puts at risk.  

For an Operating Line-of-Credit (LOC), a bank may ask for some or all of the following with differing conditions:

  • Rights to directly collect on your Accounts Receivable (AR) via a UCC-1 filing. The value of your AR as collateral is often a discount in the 80% range, excluding past-due receivables and single customer concentrations over 20%.  
  • Second position behind any specific financing on fixed assets, including vehicles, equipment, and real estate.  
  • Personal guarantees from the owner(s) of the construction business.  

Sureties and other underwriters will look at some combination of this collateral and may want to place themselves in a position ahead of the bank in specific circumstances.  

Collateral is often a challenge during succession plans as risk is being transferred.


Cash Flow
Great cash flow is a key driver of valuation and successful successions. Running out of cash is is the #1 reason contractors fail. Improving cash flow improves your Return on Equity. Protect yourself and never let cash flow be the limitation to your profitable growth....

Cash Flow
Great cash flow is a key driver of valuation and successful successions. Running out of cash is is the #1 reason contractors fail. Improving cash flow improves your Return on Equity. Protect yourself and never let cash flow be the limitation to your profitable growth....

Coaching and "GPS Feedback"
Contracting is a business where operational excellence is a major factor in winning. Project success which we all know is very different than “winning” the project depends on thousands of details over many months executed well.
Rigorous Questioning Develops Critical Thinking
Thinking is really just about asking ourselves then answering a series of questions to help us make a good decision. Critical thinking is quite simply asking ourselves a more complex set of questions then answering them from a larger base of knowledge.
Leveraging Geographic Expansion for Leadership Development
Geographic expansion is impacting all contractors whether it is major customers pulling them into new markets, new competition coming into their “hometown” or as a proactive strategic growth move by the contractor.