In today’s lending environment, “red flags” can significantly impact your ability to get the funds you need for your business. Red flags result in lenders questioning the quality of financial management within your company or of you as the owner – and assessing the quality of management and owners is a hot topic with lenders today.
Examples include:
Significant year-end adjustments: Large and sudden changes in inventory and receivables levels make lenders wonder whether those assets are being managed and recorded properly. Remember that lenders rely on those assets as the collateral for your working capital lines of credit. Solution: schedule regular meetings with your accounting firm to discuss proper inventory management software, acceptable inventory count methods, timely receivable charge offs, etc.
Incorrect line usage: Your lender questions your financial prudence and debt management if you use your working capital line of credit to purchase equipment, vehicles, building improvements and other long-term assets. And if a cash crunch results, your lender may not have the ability to quickly bail you out. Solution: discuss your asset needs in advance with your lenders and decide on the best way to finance them – term loans, equipment draw notes, etc.
Weak profitability analysis: Contractors without job costing software and companies who cannot explain the profitability of key customers make lenders question their overall financial management. Solution: work with your accountant, TEC Group, or consultant to put the right analytical tools in place.
Large personal debts: Your lender is concerned about your personal financial management and your need to draw large cash amounts from the company if you have excess personal debt – especially large credit card balances, multiple mortgages or leveraged toys. Solution: repay, reduce and refinance to limit your personal loan payments. Northstar Loans offers installment loans West Allis WI can count on for fast approval and low rates.
Red flags are harbingers of danger. Even potential dangers make lenders nervous, and nobody wants a nervous lender.
— Adam Newman is vice president and business lending manager at Landmark Credit Union in New Berlin.
