Every business owner wants abundant cash flow in their business. It’s emotional and practical. Cash is like oxygen. Your business can’t function without it.
When cash is in short supply, owners become lightheaded, then despondent, then desperate. Cash represents success and lack of it, failure. It’s not a question of “if” cash is in short supply, it’s a question of “when”. What do you do? Many business owners go to their bank for a line of credit.
If you read my last post, you may remember that 8 out of 10 business owners have a bank, but not a banker. So, who do you go to for banking advice? Your CPA might try. But they know taxes and accounting, not banking. Your attorney gives legal advice, and he didn’t go to law school to give banking advice either. People do business with people they know, like, and trust. If you don’t have a banker that fits this, then it’s time to find one.
Until then, there are two things you need to ask yourself: “Are you bankable?” and “Are you bank-ready?”.
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. 3 out of the 4 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.
Are you bankable?
1) How leveraged are you? If your total debt divided by your total net worth is greater than 3 or 4 to 1, then borrowing money from a bank may be hard. Banks want the business owner to have a little skin in the game. If you’re pulling out too much money, they may feel like you’re not taking enough of the risk and they’re taking too much. You may need to pursue a lender that will loan you money based on your accounts receivable 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. Banks want to see some cash on-hand to be able to handle unexpected expenses.
3) How are you collecting your receivables or turning your inventory? If you are well below terms on either compared with your industry average, 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. You’re wasting your time going to the bank with a loss last year. I would recommend looking for other options, like the ones mentioned above.
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. If you’re not sure that everything is properly categorized and recorded, let’s talk today.
Imagine the possibilities of what your business could be like with extra oxygen on standby in the form of a line of credit. Wouldn’t it help you sleep at night knowing you had successfully secured the financing you need for your business?
Save yourself the extra hassle and heartache up front by making sure you’re bankable and bank-ready before approaching the bank with your loan request.
Download your copy of our “Are you bankable and bank-ready?” checklist here.