“You're not a good fit with our bank. We wish the finest of luck in finding an economic institution who are able to meet your needs.”
How many times have you ever heard that out of your friendly local banker? More times than you choose to admit.
I recently spoke to some banker who put into perspective the difficult decisions made each day when looking for new client lending relationships. “The bank can't be wrong several out of every hundred dollars of loans.” Quite simply, if bad loans climb above one percent of total loans outstanding, the bank begins to lose its credibility like a safe haven for deposits which are their lifeblood.
That doesn't leave much room for error.
- Get a plan: Having a business plan including pro-forma projections is essential! Make use of your projections on a minimum of a quarterly basis to gauge trends inside your marketplace and understand variances in your operating results.
- Cash is king: If you're not collecting your cash in a timely manner, the bank will assume you won't re-pay the loan on time. Revisit your credit, billing and collections policies and implement necessary changes to improve your cash flow. When you assess the profitability of the customer, consider how fast you are able to collect your revenues. Selling to a “big” client isn't often the right move if they won't pay you for 3 months.
- Diversify the consumer base: When any customer exceeds 10 % of your total sales regularly, it's time to have some new customers. If customer concentration levels exceed certain thresholds, the financial institution will deem you to definitely attend greater risk to your customers' bankruptcies or contract defaults and may reduce your borrowing base.
- Know your collateral: Banks look for three sources of repayment – income, company assets and assets of the owners. Know what you have and how much it's worth.
- Invest in people: First, make certain your company has more than one person capable of making big decisions. Second, assemble an assorted team of trusted outside advisors which meets regularly to ensure the business is on track and eager for contingencies.
- Build good systems: Information is power! The ability to provide accurate and timely reports on receivables, inventory, payroll, payables, fixed assets along with other areas is critical to proving you have control over your operations.
- Hire a good CPA: Hire a reputable accounting firm that represents clients that obtain the type of financing that you'll require. The more money you want to borrow, the higher the degree of scrutiny your fiscal reports will receive.
- Focus on relationship: Banks aren't simply thinking about loans -they want to provide you with a host of services. The more services you may use, the more valuable of a prospect you become.
Each of those bits of advice individually will not be certain that by tomorrow you'll become a bankworthy credit. However in combination with the 5 C's, you will improve your possibility of hearing the words, “you're a great fit for the bank! The loan has been approved!”
