“You’re not a good fit with our bank. We wish you the best of luck in finding a financial institution who can meet your needs.”
How many times have you heard that from your friendly local banker? More times than you care to admit.
I recently spoke to a banker who put into perspective the difficult decisions made each day when evaluating new client lending relationships. “The bank can’t be wrong more than one out of every hundred dollars of loans.” In other words, if bad loans climb above one percent of total loans outstanding, the bank begins to lose its credibility as a safe haven for deposits which are their lifeblood.
That doesn’t leave much room for error.
Visit enough web sites with advice on how to borrow money from a bank and you can find about the “five C’s of credit” – capacity, capital, collateral, character and conditions. Once you’ve mastered these basic criteria, are there additional things you can do to improve your likelihood of gaining admission to that select group of bankworthy borrowers? The answer isYES!
- Get a plan: Having a business plan including pro-forma projections is a must! Use your projections on at least a quarterly basis to gauge trends in 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 your loan in a timely manner. Revisit your credit, billing and collections policies and implement necessary changes to improve your cash flow. When you evaluate the profitability of a customer, consider how quickly you are able to collect your revenues. Selling to a “big” client isn’t typically the right move if they won’t pay you for 90 days.
- Diversify your client base: When any customer exceeds 10 percent of your total sales on a regular basis, it’s time to find some new customers. If customer concentration levels exceed certain thresholds, the bank will deem you to be at 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 – cash flow, company assets and assets of the owners. Know what you’ve got and how much it is worth.
- Invest in people: First, make sure your business has more than one person capable of making big decisions. Second, assemble a diverse team of trusted outside advisors which meets regularly to make sure the business is on track and prepared for contingencies.
- Build good systems: Information is power! The ability to provide accurate and timely reports on receivables, inventory, payroll, payables, fixed assets and 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 need. The more money you want to borrow, the higher the level of scrutiny your financial statements will receive.
- Focus on relationship: Banks are not simply interested in loans –they want to provide you with a host of services. The more services you can utilize, the more valuable of a prospect you become.
Each of these bits of advice individually will not guarantee that by tomorrow you’ll become a bankworthy credit. But in combination with the 5 C’s, you will increase your chance of hearing the words, “you’re a great fit for our bank! Your loan has been approved!”
This article was contributed by Marshall Lebovits of Asset Based Funding Solutions. With over 30 years of experience in the secured financing industry, Marshall’s passion is helping growing companies with non-dilutive, asset backed financing solutions. Companies who benefit from Marshall’s advice usually have B2B accounts receivable, inventory, purchase orders and equipment that can be offered to a lender as collateral for repayment of a loan. Marshall has served as a mentor for PCV’s BusinessAdvising.org program since 2016 when he led an online webinar on The Secrets to Getting the Right Small Business Loan. He can be reached at (310) 344-2522 or via email at Marshall@Funding911.com. You can also view Marshall on the web at https://www.linkedin.com/in/marshalllebovits/ or follow him on Twitter @Funding911.