There comes a time when a business
grows fast enough that it needs to
ask a bank for additional financing, whether it be a revolving line of credit or
an amortizing term loan. But no matter
how well a business is doing, it can’t just
assume the bank will automatically
grant it what it needs.
“Forecasting cash flow is one way to
prepare for a meeting with your banker,”
says Shannan Pratt, commercial relationship manager with Capital One
BankSM in Dallas. “Having detailed financial statements is another way to make a
good first impression.”
Smart Business spoke with Pratt
about what kinds of financing are available, how a business should go about
selecting a bank to deal with and then
what it can do to prepare for the loan
meeting.
How does a company determine if it needs
financing?
A company’s financing needs are determined by the timing of payments in
delivering the product to the customer,
along with its growth rate and margins.
For example, if your customer pays you
the full cost of product at the time of the
order, then you most likely won’t need
financing unless your margins aren’t
enough to cover your costs. If you’re like
most companies, you must pay for the
order to be produced and cover your
overhead expenses while you’re producing the product. Once the product is
delivered, you must wait until the payment is received. This order to final payment time is the gap that financing is
designed to fill. This is especially true if
you’re growing, since you’re booking
more orders each month that require
working capital to produce while still
waiting for the prior month’s deliveries
to be paid.
The best way to determine the amount
of financing needed is to create a cash
flow forecast that details the payments
needed in order to provide an expected
level of output. Overlay the expected
payments from customers to determine the net amount of cash your business
will be receiving or paying on a weekly
or monthly basis. The negative cash flow
periods will give you an idea of the
amount of financing needed to support
your business.
What can a company do to prepare for a
meeting with a banker to secure financing?
Your financial statements, current and
historical, are the primary tools that a
bank will use in its evaluation. The larger your business, the more detailed
third-party oversight of your financial
statements will be required by the bank.
An example of this is in the case of
small, sole-proprietor businesses, where
federal tax returns are the main financial
statement verification tool. A larger
business that files a corporate or partnership tax return may additionally be
required to have its statements compiled
or verified by a certified public accountant. Finally, the most detailed review of
financial statements, and the most
favored by banks, is an audit. This
allows the bank to rely on the financial statements as the size of the loan, complexity of the business and the risk to
the lender increases.
It is best to have the most comprehensive review by a CPA you can afford.
This will not only give the bank more
confidence in your company’s financial
reporting, it will also help future equity
investors have the same confidence in
your company.
What types of lines of credit or large-scale
financing products are available?
One of the best things about commercial banking is the ability to customize
the loan products to a company’s needs.
The most common working capital loan
is a revolving line of credit, which is an
amount of money the company can borrow and pay back as needed to satisfy its
cash flow needs. Based upon the assets
of the company, these lines can either be
a not-to-exceed borrowing amount or a
variable amount based upon accounts
receivable and/or inventory. Assets purchased can be financed through amortizing term loans or interest-only loans or
structured as leases.
What should a company look for in a
banker?
Your banking relationship manager is
an advisor to your company, just like
your accountant and attorney. But
unlike your accountant and attorney,
your banker is the liaison between your
company and the bank it represents.
Your banker must understand your business and industry well enough to anticipate your needs and be prepared to
respond to your requests. Your banker
should have a clear knowledge of his or
her own institution and what he or she
can provide to a business like yours.
Banks have turnover just like any other
business, so it’s important that you have
multiple contacts there for continuity in
case your banker leaves.
SHANNAN PRATT is a commercial relationship manager with CapitalOne Bank in Dallas. Reach him at (972) 855-3905 or
[email protected].