Trying to get a line of credit? Frustrated with the bank process? You’re not alone. Navigating the banking landscape can be a very time consuming process. There are two questions you need to answer before you start. Are you bank ready? Are you bankable?
What is bank ready?
Bank ready is nothing more than being able to provide financial statements that are timely and accurate. Most businesses have a month end close process that provides financial information between the 20th and 30th of the month for the prior month.
Unfortunately, I’ve seen too many clients stall out in their bank line of credit application because they can’t provide interim financial statements on a timely basis. There are a number of reasons why businesses can’t provide financial statements, but the bottom line is your banker needs them in order to move forward with your loan request. It’s not about what you tell them, but what your financials say about your business.
Further, before you give your financials to the bank, make sure all the revenue, expenses and all the assets and liabilities are properly categorized and properly recorded so you can say they’re accurate. I’ve seen situations where businesses are carrying assets on their balance sheet that should be written off or the carrying levels of those assets are inaccurate. It’s better for you to discover those errors before your banker does so you don’t lose credibility in the process. You can’t have one or the other; it takes both timely and accurate financial statements to score with the bank.
Are you bankable?
What I view as bankable comes from over 32 years of experience in the banking industry before I launched my company. It really boils down to 4 things, which show up in the financials you share with the bank and 3 of them are on your balance sheet. Say it me with, “My balance sheet is more important than my income statement.” If you think your income statement is more important to your banker than the balance sheet. Think again, it’s not.
1) How leveraged are you? If your total debt divided by your total net worth is greater than 3-4 to 1, then borrowing money from a bank may be hard. You may need to pursue a lender that will loan you money based on your accounts receivables only without regard to other factors in your financials.
2) How liquid are you? If you have less than 5 days worth of sales in cash, then you may have a liquidity problem that gives the bank heartburn.
3) How are you collecting your receivables or turning your inventory? If you are well below terms on either consistent with your industry, the bank may not be willing to rescue you with a line of credit. They may say collect better and come back when you’ve made that improvement.
4) Were you profitable last year? If you weren’t, don’t bother going to the bank, regardless of the good year you’re having this year. A bank believes the best indicator of the future is the past. They won’t believe you’re going to make money this year until they see it in your year-end financials five months from now. You’re wasting your time going to the bank with a loss last year. I would recommend looking for other options.
As with anything, they’re always exceptions, but bank ready and bankable are two words I’d like to suggest you add to your vocabulary when it comes to taking out a line of credit or renewing one with your bank. If you want help evaluating whether your company is bank ready and bankable or want help getting there, please contact us.