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This article first appeared in the July/August 2002 issue of The RMA Journal. Nearly a decade later, it's clear that loan structuring is still an art, not a science. Reasonable people may always disagree, but the approaches of most experienced lenders are never far apart.
Loan structuring is the process of breaking down the financing requirement in terms of repayment-seasonal, term, bridge, and permanent capital loans-and analyzing, approving, pricing, documenting, and monitoring each component accordingly. Each type of loan has its own particular characteristics of analysis, loan facilities, collateral, risks, and opportunities.
The process of loan structuring begins by identifying the financing requirement. With new loan requests, the first of a series of pro forma balance sheets takes into account all of the uses of the loan's proceeds and computes the requirement. With existing loans subject to periodic review or renewal, the bank's outstanding loans, and perhaps other debt as well, constitute the requirement. Existing loans should be reexamined periodically since the original assumptions may have changed.
Seasonal Loans
The seasonal loan generally funds an increase in inventories, such as purchases of Christmas wares by retailers or the manufacture of seasonal items like toys or snowmobiles. The cash created by the loan is disbursed to suppliers and labor, the inventory is sold, receivables are collected, and the bank is repaid over what should be a relatively well-understood schedule.
However, things rarely work with such well-defined precision. Retailers may have several overlapping seasons, such as Easter, back-to-school sales, and Christmas. The trick is to not still be financing Easter inventories while advancing for Christmas wares.
A farmer will have highly predictable cash needs until after harvest, when the seasonal loan should be at its peak. Repayment will then depend on the marketing plan-which is when and how the farmer will sell. The prior year's seasonal loan may well be paid in the first and second quarter of the current year or even further out, resulting in the bank having to maintain and monitor two separate seasonal loans simultaneously.
Such service businesses as accounting firms may collect the bulk of their receivables at one time. The bank will probably be funding expenses, resulting in losses until the second and third quarters of the year, when...