Do you ever feel like when you ask your bank for a loan, the “people behind the curtain” control your destiny?
As bankers, it’s easy to hide behind our “loan committees” but in reality, a loan should never get to a loan committee unless you and your banker are on the same page. Building a relationship with a business banker is critical to the success of your business. Here are six important things you should ensure that you and your banker understand about your business when looking at a loan request:
1. Management/credit – Honesty and integrity are paramount. Your “character” is the most critical part of your company and your interactions with your banker. The business owners’ credit score plays a large role in the credit decision, so it is important to manage your personal finances responsibly. Also, management experience and depth of industry knowledge are key factors.
2. Cash flow – Cash in/cash out. What’s available to pay all expenses, loan payments, and proposed debt? Banks calculate debt service coverage, which is simply available cash (net profit + interest expense + taxes + depreciation + amortization) divided by the proposed and existing principal and interest payments.
3. Profitability – This is the relationship between gross revenue, gross margin, operating expenses and taxes. How is the “bottom line” helping or hurting your ability to obtain a loan? Are you retaining profits to keep the balance sheet strong enough to weather cycles?
4. Collateral – Pledging assets such as equipment, real estate or accounts receivable is necessary to support borrowings. The days of unsecured credit have waned.
5. Industry trends – How is your business trending compared to peers in your industry? Bankers have data they can share with you to show your industry trends (cash, receivables, inventory, debt, gross profit, operating expenses, operating profit and profit before taxes, to name a few) compared to your performance.
6. Capital – What’s your available capital in terms of liquid assets, positive operating cash flow and line of credit? Capital is critical to business health, as businesses that have a comfortable level of capital can weather the storms.
When you have a credit need, building a strong relationship with your banker and understanding these key topics leaves nothing to question, especially for those “people behind the curtain.”
— Kerry Barlow is business banking manager at Wells Fargo & Co. in Milwaukee.