Bio and Credit Tools

Bio brief & The Evolution of the Tools for Efficient & Effective Commercial Lending

First, let me say, thanks for visiting my website! 

My 30+ years of SME lending is marked by the development of three tools for efficient & effective commercial lending.  Initially developed for my own efficiency as a commercial banker in California, the tools continued to evolve in my “second career” as I taught and applied them while working in emerging markets as a development banker. Now in my “third career” as an author, I scrutinized the tools on an academic level and discover a basis for a new, simplified approach to cash flow analysis with some spectacular revelations. Here is my brief “bio” tracking the evolution of the “tools:”


California (1980s)   “The Four Legged Chair” 

As a junior lender in California I saw a pattern as to which of my loan proposals were declined.  A few years later as a more senior lender, I was asked to teach the credit courses for the bank’s junior lenders. I shared with them this practical observation: "Theory aside, if your loans are declined, it will be for one of these four reasons..."  

·         Unreliable Profitability

·         Insufficient Equity (measured by financial leverage)

·         Insufficient Collateral

·         Absence of Owners’ Guarantees 

I originally called these "the Four Hurdles;" but later these four elements became the “legs” of my model “the Four-Legged Chair.”   

Bulgaria  (1992-1994)   “The First Hurdle Analysis”   

The Soviet Union had collapsed. Wanting to participate in the historic change, I joined the Peace Corps and worked with bankers in Bulgaria.  Capitalism had suddenly replaced the defunct centrally-planned economy, and these former communist bankers had to learn the most critical concepts and tools immediately.  I condensed the two year course that I taught in California into a one week seminar (“Credit in a Free Market") by isolating the critical, salient points and presenting them in two practical models, summarized in a two-page handout that became the genesis of the First Hurdle Analysis.


The First Hurdle Analysis is a methodology that applies the principles of the 4-Legged Chair to assess general creditworthiness; then, if the borrower appears to be creditworthy, turns to a second model (originally called the Time-Balanced Balance Sheet) to determine the best credit structures.

Russia (1996)  “The First Hurdle Analysis” is validated

The First Hurdle Analysis proved to be an effective screening tool in 1996 in Russia where my Russian staff and I used it to supervise the Enterprise Support Project (ESP).  ESP was a $300,000,000 credit facility joint-funded by the World Bank and the European Bank for Reconstruction & Development (EBRD) to initiate loans to SMEs through a dozen Russian banks. This intense usage confirmed the efficiency of the First Hurdle Analysis, as well as the academic integrity of the two underlying models. 

I continued to refine all three tools in practice for several years while supervising credit lines granted by the World Bank to commercial banks in East Europe and Central Asia.

Malta (2010) "The Cash Cycle Balance Sheet" --Cycle-Based Cash Flow

Taking a break from consulting to work on a book for junior lenders (relaxing on a sunny Mediterranean island is conducive to creative thinking!), I was striving to provide an academic explanation for the traditional paradigm for structuring credits: short term loans provide cash for current assets, long term loans provide cash for fixed assets. Light bulbs began to light up:

1.   Cash flows in cycles: funds from investors (creditors & owners) are invested into assets; the assets, in turn, generate cash flow to repay the investors.

2.   There are two cycles because there are two kinds of assets which generate cash flow in fundamentally different ways.  Accounting convention validates this: assets and liabilities are divided into short term and long term (or “fixed”).  What about equity? 

3.   If we divide equity into working capital and fixed capital, the balance sheet is divided into two: a short-term balance sheet and a long term balance sheet. Moreover, the two balance sheets depict the two cash flow cycles!

In January 2011, with the addition of “fixed capital,” the “Time-Balance Balance Sheet” matured into the Cash Cycle Balance Sheet.  

So far, this was innocuous, but one revelation led to another and began to challenge convention. The two most heretical discoveries are: 

4.   The measures for working capital and the current ratio are flawed, distorted by including CPLTD in the current liabilities. "Negative working capital is not negative!" That was the message tested, and validated, in the Journal of Accountancy (2011) and again in The RMA Journal (2015). 

5.   The notion of cash flow cycles was lost with the introduction of FAS95 Statement of Cash Flow and the UCA Cash Flow Statement. The Cash Flow Statement may work well for investment bankers, but misclassifies some cash flows and leaves others out entirely, notably Maintenance Capex. This has led some commercial bankers to incorrect interpretations, to the detriment of themselves and their clients. Again, tested and validated by publication in the preeminent journal of commercial bankers, The RMA Journal (2018 & 2019). 

Cash Flow 3.0 - the book (2013) The dominoes continued to fall, one discovery leading to another, each a new chapter, developing into a book. 

(return to the Home Page to download articles for free, or to order the book)

© Bartoletti  www.SME-lending.com  March 2012