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The Rose Report: How Do I Make Sure My Bank is There When I Need Them?
While all businesses need cash to survive, emerging growth businesses seem to have an insatiable appetite for cash. These companies need to find external sources of cash to fund their asset acquisitions, working capital, investment in R&D, and investment in new markets. While most business bank loans of $100,000 or less are issued based on the personal credit of the founder(s), larger loans require more underwriting by banks. Bankers prefer to lend to companies that can demonstrate they operate at a profit, have assets for collateral, have solid management, and have reliable financial information.
A business’ track record is critical. In most cases, banks like to see two years of profitability before they will lend to or increase a company’s business loan. When a company can maintain profitability, the bank can reasonably expect to have its loan repaid out of the cash flows of the company. Additionally, if the company’s trends reflect growth, a bank would also expect that the company’s lending needs would increase in the future. This makes profitable and growing businesses some of the most sought after companies for bankers. Bankers like to develop lending relationships with these companies before they grow large enough to get on other bankers’ radar screens.
While smaller companies can present more risk for lenders, lenders look to mitigate this risk during the underwriting process. Banks will ensure that the business has enough asset value at liquidation prices to repay the loan. Three of the more common asset types that growing companies need to fund are accounts receivable, fixed asset, and inventory. Banks may lend 75–90% on accounts receivables, 50–80% on certain fixed asset purchases, and 50–75% for inventory acquisition. In many cases, a business can eliminate a portion of their asset funding requirements by making changes in their business model. Companies collect cash in advance from their customers, they lease their fixed assets, or they request extended payment terms from their vendors to fund inventory purchases. Banks are typically not interested in funding investments in R&D or the development of new markets. For the most part, companies look to fund these types of investments with retained earnings or an equity investment.
While bankers require borrowers to have positive cash flow and collateral, they understand that the bank is ultimately relying on the company’s management to execute on the business plan and return the funds plus interest to the bank. They know that the risk of a loan is significantly lower when management has integrity, experience within the industry, and access to quality financial information. Keeping an open dialog with your banker is an important part of managing your banking relationship. Giving them accurate and timely information allows them, in many cases, to assist you in navigating the banks own internal underwriting procedures.
If your company has a down quarter, and you don’t have a relationship with your banker or your financial information is inaccurate or untimely, the bank may begin to lose comfort with your company. As a bank loses comfort with a borrower, the bank will ask for more financial information, an audit, more collateral, an increase in loan covenants, or a partial repayment. If a company is unable to respond in a timely fashion to these requests, the loan officer will refer the loan to the bank’s “Work-Out” department before they proceed to foreclose on the note. All of these items will ultimately increase the cost of borrowing for the company.
What can I do today to improve my company’s ability to obtain funding or an increase in funding from our bank?
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Ensure your company has timely, complete, and accurate financial reporting
Ensure your company has timely, complete, and accurate financial reporting•Ensure your company has an adequate internal control structure
Ensure your company has an adequate internal control structure•Respond to your bank’s request for information in a timely and complete fashion
Respond to your bank’s request for information in a timely and complete fashion•Monitor your current loan covenants and keep your banker informed of potential issues
Monitor your current loan covenants and keep your banker informed of potential issues•Prepare meaningful projections or budgets and track your company’s performance
Prepare meaningful projections or budgets and track your company’s performance•Develop an open relationship with you banker and keep them informed of your plans
Develop an open relationship with you banker and keep them informed of your plans•Give your banker advanced notice when additional funding is needed
Give your banker advanced notice when additional funding is neededAs your company’s need for capital grows, it is important to ensure you are working with a bank that wants to work with you. It is also important that you do your own due diligence on the bank you choose. You need to know the size of the bank’s customers, the industries the bank supports, and the general parameters or covenants it requires for the loan type your business desires. If you do your homework, the bank’s response to your lending request should not be a surprise.
What do companies look for in a bank?
•Loan officers and banks that understand the borrower’s industry
Loan officers and banks that understand the borrower’s industry•Loan officers with the ability to make credit decisions locally
Loan officers with the ability to make credit decisions locally•Competitiveness of loan covenants
Competitiveness of loan covenants•Competitiveness of loan terms including interest rate
Competitiveness of loan terms including interest rate •Ability to handle all other banking needs
Ability to handle all other banking needs•The bank’s local lending limit and overall lending limit
The bank’s local lending limit and overall lending limitYou should view your banker as a partner in growing your business. When a banker is treated like a partner, more times than not, they will be there for you when you need them.
Source: Ted Rose is the President of Rose Financial Services, based in Rockville, MD. If you have any comments or questions, he can be reached at info@rosefinancial.com or 301.527.1130
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