Campari Lending Principles
Campari lending principles are a set of guidelines used by banks and some investors to structure how they go about making lending decisions. An awareness of the campari lending principles is useful for business owners for writing and presenting their business plans. They can be used as a check list to make sure everything is included and as a way of anticipating questions from lenders.
The CAMPARI acronym
Before explaining the individual components of campari lending principles I’ll briefly go over what the acronym stands for.
C is for character
A is for ability
M is for management (some people use M for means)
P is for purpose
A is for amount
R is for repayment
I is for insurance
Fans of the TV series Dragons’ Den will know that the investors are often very interested in the journey that the entrepreneurs have made so far. They are trying to get a general impression of the person, their history, and commitment to make the idea work. Bankers and other investors will also be trying to examine the character of the entrepreneur to see if they can trust this person with their money. Remember that ideas need people to make them work.
What kinds of skills is the person bringing to the company? Does the person have management experience and skills? This is important, as having the skills to do the work, computer programming or carpentry for instance, does not mean that you can run a successful business. Does the person have “natural” business ability? This might be judged by looking at the entrepreneur’s record keeping and ability to provide / present important information, especially financial information.
Who are the key people in the management team? This includes the people below the level of owner. What experience, education and training do they have?
Why is the entrepreneur asking for this loan or investment? Will the money be invested in the business, or is this equity release for one or all of the business owners? Is the money designated for a particular purpose, advertising for example, or is it going into the general pool of working capital? (In this description of campari lending principles we can’t say what is the correct answer: Every business and investor will have a different interpretation of what the best answer is.)
How much does the business owner want to borrow or want an investor to invest? If the business owner is looking for an investment, how much of the business is she prepared to trade for the investment? Is there a possibility of a performance deal in which the entrepreneur can earn back some of the stake she gave away? For example she might give away a 40% stake, but if she hits a pre-defined turnover or profit target within a certain time the investor will give back 10%.
The business owner should also remember that some financing comes with arrangement fees. Does the amount she is asking for include the arrangement fee?
What is the anticipated length of the loan? If you want to borrow money from a bank you need to tell them not just how much, but also how long you want the loan. If you are asking for money from angel investors or venture capitalists you need to give them a guideline for when they can cash out their investment. Most venture capitalists are not looking to hold onto stock indefinitely.
Investors and bankers will want to look at the financial details. In particular they want to look at cash flow (cash is king!). They will test the entrepreneur’s assumptions and have their own opinions on how realist the repayment schedule is.
At first it may seem a little peculiar to include insurance as a criterion for getting finance. However, small businesses and entrepreneurial ventures are highly dependent on a few key personnel for success. Larger businesses have a larger talent pool to draw on in case of personal emergencies/ tragedy. Smaller businesses and startups don’t have this luxury. It is therefore important that the business has insurance cover for these people.
Insurance also means security for the loan. This won’t be so important for angel or venture capital investment, but it will be for bank loans. Although in theory limited companies shield investors from the debts of the company, in practice bankers will want directors to sign a personal guarantee that the company will repay the loan.
Following campari lending principles won’t guarantee that a business will get a loan or an investment. Nor will they guarantee that banks and investors will get their money back with a profit. However, as I stated at the beginning of this post, they do serve as a useful a guideline for sketching out your business plan and your pitch.