UNDERSTANDING THE 5 CANONS

I have heard several business owners complain about the uncooperative attitude of operators in the banking sector when it comes to supporting and providing necessary funding for their operations. Requests for support or funding are usually turned down for reason that could have been avoided if the operations and processes of the sector are well understood and appreciated by the business owners. Running your account with the institutions for a while with good activity does not guarantee an approval.

The major challenge from experience can be narrowed down to lack of understanding of the internal requirements and of the workings and requirements of the banking sector. Requests are made in error leading to matching problems and loan default and the refusal of the banks to extend assistance without the business fulfilling certain requirements. Even the scriptures confirmed this in James 4:3

One of the key principles or requirements used to test the business and the request is known as the “Canons of Lending”. The canons, which will be analyzed should be well understood by business owners and could also form the foundations for other dealings when applied to the daily operations.

1.     Character

Focus is on the players and promoters of the business and the traits they exhibit in the personal or official life, relationships, affiliations, etc. This is the core of the process and underscores the other canons. Some of the variables considered are:

·           Personal attributes/Character

·           Integrity/honesty of the players/promoters

·           Beliefs and value system

·           Affiliations/associates/contacts

2.     Capital

Measures the level of involvement in the transaction/project and the level of funding required for the business. From the whole transaction, what are you putting on the table; “talk the talk and walk the walk”. The question is; do you have something to lose should the business go south? The variables include:

·        Level of commitment

·        Financial and human capital

·        Sustainability of the funding/cashflow

·        Cost of the capital and repayment source/ability

·        Sources of funding and continuity

·        Ability to survive after the owner

3.     Capacity

Focuses on the experience in similar field or transaction, trainings acquired, depth of ownership and management, etc. it measures the ability to handle the type and volume of business and see it to conclusion. Every transaction must have at least any 2 (two) of the 3 (three) repayment sources: the transaction in question, other transactions (can repayment be generated from another source should the main transaction fail and collateral pledged. Key variables are:

·        Level of experience and exposure

·        Management and ownership depth

·        Procedures/processes and structures in place

·        Leverage

·        Similar function, job, tasks and project

·        Cash generating ability

4.     Conditions

It reviews the conditions surrounding the business or project, the trend in the economy or business sector or environment to determine the future. Is the sector in the development, growth or maturity stage and the likelihood of continued existence? The government support, commitment and pronouncement also have a lot to play in determining the workability of the project or transaction. Key variable to consider include:

·        Terms and conditions of the transaction

·        Environmental issues

·        Threat and opportunities

·        Government involvement and regulations

·        Ability to generate positive cashflow

·        Ability of the business to remain a going concern

5.     Collateral

Usually the secondary or tertiary source of repayment should the other two (discussed under capacity) fail. It measures the convertibility, genuineness and adequacy as against the amount in question and should provide at least 150% cover. In essence, the forced-sale-value (FSV) should be sufficient to cover the exposure. Key variables are:

·        Ownership and legal standing

·        Adequacy and sufficiency

·        Realisability/Convertibility to cash

·        Location

·        Alternatives

This essence is to better have a good understanding of this principle which could also be applied to our daily activities or in dealings with 3^rd parties. Before you commit yourself, do a thorough analysis of what you are getting into to avoid regrets. Understand your system and your needs to save time, energy and resources. Once you have full understanding, you might discover what you need is more of spontaneous financing rather than bank loan.

For clarification/assistance: michael@bizadvisory.tk or maajayi@emoyolgroup.com.