[vc_row css=”.vc_custom_1548289356400{background-color: #bcbcbc !important;}”][vc_column][vc_single_image image=”4862″ img_size=”full” alignment=”center”][vc_column_text css=”.vc_custom_1753495727499{padding-right: 19px !important;padding-left: 19px !important;}”]As a business owner, you need to understand credit and risk and how your banker measures your credit worthiness. In this chapter, I discuss the five C’s of credit and what you need to be paying attention to.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text css=””]

Chapter 2: Understand Credit

If you are planning on borrowing money from your local bank, you should go into it with a full understanding of the principles of credit. Bankers need to gauge your creditworthiness and they look at a number of things in addition to your financials. These are often referred to as the five C’s of credit. Let us take a look at each of them.

Character

How is your banker going to know and understand your character if you have not taken steps to establish a professional relationship with him or her? What if you have never even met your banker? Relationships take time and waiting until the time you need to borrow money is too late. Bankers want to minimize the risk of default and if they do not know you or have a long-term relationship with you, you are considered to be more of a risk. Some lenders consider your character as the most important decision-maker for them. Your character involves your prior business experience within the industry, your credit history, referrals, and references as well as your standing within your community.

Bankers will want to review your personal and business credit history before loaning you any money. It would be good for you to take the time to review your personal and business credit history before approaching the bank to ensure that there are no inaccuracies. If there are inaccuracies, get them corrected before going to see your banker.

Capacity

Do you have the capacity to repay the loan? Banks and bankers obviously want the money they loan to be repaid and they want to see that you have the capacity to do so. If your debt-to-equity ratio is too high, your capacity to repay the debt is too low and it is unlikely you will get a loan. It is important for you to understand this ratio, not only on an ongoing basis as you run your business but also before you engage your banker to borrow additional funds. Bankers tend to loan at a 2:1 ratio, meaning they will loan two dollars for every one dollar of equity in the business, depending on your credit worthiness.

Capital

What kind of capital are you willing to put toward securing your loan? Any contribution by you the borrower helps to reduce the risk of default. Do you have personal wealth or assets that can be used as a secondary repayment source through the sale of the pledged asset? That is not much different than being required to put down 20 percent on a new home you are buying. The down payment on your home indicates how serious you are, which makes the lender more comfortable and more willing to make the loan.

Collateral

Do you have both business and personal collateral invested in your business? In other words, do you have skin in the game? Are you maxed out and leveraged to the hilt or do you have room to borrow additional funds? How good are your accounts receivables? How much cash do you have? What is the status of your inventory and hard assets within the business? These are questions you should be able to answer.

Conditions

What are the current conditions in the economy and your industry? What are the current trends and are they trending in your favor? Or is government regulation or other issues out of your control going to affect the business’s ability to repay the loan? Who is your competition? Have you analyzed your competition’s strengths and their weaknesses? How will you differentiate your business from the competition? Having an understanding of the conditions within your industry and the economy as well as being able to discuss these with your banker will give him or her confidence in your ability to manage your business. Conditions can also refer to how you, the borrower, intend to use the funds.

Aside from these five C’s of creditworthiness, another major factor is trust. All relationships are built on trust including banking relationships! Bankers have to trust that you have supplied current and accurate financial information. They have to trust that you have been truthful in how you have described your business, its current state and the desired future. Bankers want to know that you have a plan on how you are going to utilize the funds being borrowed and how you will pay them back. By consistently doing what you say you are going to do, you can build trust.

The bankers I interviewed want their customers to have a deep understanding of their financials as well as an understanding of debt and what that means for the business. They do not want to lend to business owners who are flying by the seat of their pants.

Your banker wants to know that you not only have the necessary experience but that you know what you are doing and take business seriously.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]

Make Your Banker Happy

10 Keys to Unlocking a Good Relationship with Your Banker

The various aspects of your business are like links in a chain, and your banker serves as one of those links. Because any chain is only as strong as its weakest link, it’s vital to develop an excellent working relationship with your banker, even to the point where your banker is a trusted advisor. In this book, a leading consultant who helps his clients generate dramatic results you will show you the keys to unlocking a good relationship with your banker.

As a business owner, your relationship with your banker is essential to your success. Follow our series on the website and get your desktop reference copy from Amazon.[/vc_column_text][vc_single_image image=”4854″ img_size=”full” alignment=”center”][vc_column_text]

Get Your Copy

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[vc_row css=”.vc_custom_1548289356400{background-color: #bcbcbc !important;}”][vc_column][vc_single_image image=”4859″ img_size=”full” alignment=”center”][vc_column_text css=”.vc_custom_1753495815549{padding-right: 19px !important;padding-left: 19px !important;}”]The numbers drive everything in your business, so it pays to understand them and the important role they play in ensuring your success. These numbers are the scoreboards that let you know if you are winning or losing the game of business. This chapter discusses the scoreboards that you need to understand.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text css=””]

Chapter 1: Focus on Financials

All of the bankers I interviewed said that their best customers are focused on their financials on a regular basis and provide accurate information when asked. No surprise here since the numbers drive everything in your business and if you are not focused on the numbers, then you do not know if your business is winning or losing the game.

Not knowing your financials is like going to a sporting event and not being able to see the scoreboard. You think your team is winning but you are not sure because you cannot see the scoreboard. The scoreboards in your business are your financials: the P&L (profit & loss) statement, balance sheet, and cash flow projection.

The bankers I interviewed want their customers to understand and be focused on their financials, and to provide accurate information and realistic projections to the bank in a timely manner. This requires you, the business owner, to have a deep understanding of your financials and to be reviewing them often. This is not achieved by managing your business from your checkbook and spreadsheets, but by actively reviewing and comparing your P&L statement, balance sheet, and cash flow on a minimum of a monthly basis and preferably weekly.

Bankers like businesses that produce a budget and then compare their actual to the original budget on a regular basis. This is how you track how you are doing in your business on an ongoing basis; there is no good reason to wait until the end of the year for surprises, and bankers do not want to see that either. Producing a budget and comparing it to actual is how you measure performance. The good news is that which we measure tends to improve.

I find that far too often business owners are not paying close attention to their financials; instead they wait until the end of the year to see how they are doing. I have had business owners tell me they know where they are even though they are not paying attention to their financials. When I ask how that is possible they say, I have money in my checking account so I know how I am doing. That is not how you get your banker to love you. Your banker does not want to see your checkbook register or your spreadsheets; your banker wants to see your financial statements generated by an accounting software package.

When I asked the bankers what percentage of their customers know and understand their numbers, most said 25 to 50 percent. Obviously there is work to be done. A few of the bankers said that 50 to 100 percent of their clients know their numbers, and these are their very best clients. If you are not in the 50 to 100 percent that understand their numbers, it is time to change.

The bankers I interviewed said that their best customers know their numbers and provide the information in a timely manner; saying their very best customers provide the information before even being asked. What I found particularly interesting and telling is that the bankers who discussed their very best customers have trimmed their client list down to only the very best businesses, where the business owner knows and understands their financials and often communicates with the bank before being asked. The bankers who responded that 50ñ100 percent of their clients understand their numbers were also bankers who said they have weeded out the poor-performing clients and are only dealing with clients that understand their numbers and perform well. They no longer will work with clients who do not understand their financials, or have poor business practices and/or poor performance.

Not surprisingly, the bankers report that their most challenging customers do the opposite of what their best customers do which is pay attention and understand their financials. Considering that the greatest cause of poor performance is not knowing your numbers, it is time to get serious about understanding your financials. You are the business owner; if you do not understand or pay attention to your financials and are unable to provide accurate reports in a timely manner, this will send a big red flag to your banker (and it causes them to want even more information). If you are solely depending on your bookkeeper or CPA to provide you the numbers without you reviewing them for accuracy and understanding them, you are putting your business at risk. I have seen far too many bookkeepers and CPAs who just fill in the blanks and are not providing their customers with guidance.

Again, the numbers drive everything in your business. You do not need to be an accountant or have an accounting degree, but you do need some basic accounting knowledge. Doing business without understanding your numbers is a bit like driving a car without instruments. You may think you are going 70 mph when you are only doing 35 mph. Or you thought you had a full tank of gas, but it was really only one quarter full.

Just like a musician needs to understand the language of music-sharps, flats, chords, and so forth you need to understand the language of business, which is accounting. As your business grows, you can no longer manage the business from your checkbook. Keeping clear and accurate records for your business is critical to your success.

Most of the bankers I interviewed said that they do not require a cash flow projection, despite the fact that your cash flow statement is an important internal tool to track the movement of cash in and out of your business. Some bankers said not enough businesses produce them, and others said that very few companies below $5 million in revenue generate cash flow projections. While they agreed that business owners should be producing them, they do not require them.

(Note: The Small Business Administration (SBA) does require cash flow projections.) However, the bankers also stated that the well-run companies they work with understand their cash flow.

If you want your banker to love you, make sure you provide him or her with regular and accurate financial statements, such as your monthly and YTD P&L statement as well as the P&L comparison to the same period of time for the previous year or two. Provide an accurate balance sheet and a rolling six-month cash flow projection as well as a budget. Many of the lenders do not require the cash flow projection, but I highly recommend that you not only understand the cash flow but you also provide a copy to your banker. Too many business owners only pay attention to their P&L and net income; those who fall into that trap often do not understand that net income is the theory of cash, not actually cash, since the P&L only takes into account revenue and expense items but does not take into account debt payments, owners, draws, disbursements, or dividends.

Make sure you have reviewed your financials for accuracy before providing them to the bank. I had a client who showed up for a meeting with his banker with financials in hand, not realizing that instead of accrual accounting his bookkeeper had printed them in cash-based accounting. The statements are not the same and banks prefer accrual accounting principles. Missteps like this can be embarrassing, but they can also raise red flags for your banker. Let us take a closer look at the information your banker needs.

Profit and Loss Statement or Income Statement

The P&L (profit & loss) or income statements are simply a report of your revenue minus your expenses, which equals profit. Your P&L should be prepared and reviewed no less than monthly. Far too many business owners wait until the end of the year to see if they made money or not. Income statements are like a movie of a period of time in your business; for example, quarter one (Q1), quarter two (Q2), or YTD. It is important to note that the P&L and balance sheet are lagging indicators, and when you get them from your accountant or bookkeeper, the information may be three or four weeks old. Know and understand where you are and be prepared to engage your banker in a discussion if necessary. I suggest that you also do a comparison of your income statements to previous months, quarters, and YTD. It is important to remember that net income is not cash, it is only the theory of cash because once again the P&L does not account for debt payments, owner draws, or disbursements, which are a use of cash.

Balance Sheet

A balance sheet is a snapshot in time and a record of the things you own and what you owe. On the left side is a record of everything you own such as cash, accounts receivables, inventory, plant, and equipment. On the right side in the upper section are the things you actually own, and in the bottom right section are the things you owe money on, or liabilities, both short term and long term. The right side of the balance sheet the things you own plus what you owe should balance with the left side (hence the reason it is called a balance sheet). Having an accurate balance sheet is vital to your business because it allows you to measure profitability. Understand that the balance sheet is a snapshot in time on one particular date (for example, December 31, 2018). I would suggest that you also use the balance sheet as a comparison tool. What does the balance sheet look like on December 31, 2018, compared to the same day in 2017 and 2016? Using the tool as a comparison helps you to see how your business is performing year to year.

I have run into a number of businesses using cash-based accounting principles. It is important to note that if you are using cash-based accounting, which I do not recommend, your accounts receivables and inventory will not show on your balance sheet. This can make a significant difference in the wealth within your business and your financial statements.

Your banker will consult your balance sheet to see your retained earnings in the business. The retained earnings are where wealth is created in your business. A common error that business owners fall into is taking too much revenue out of the business rather than building wealth. When you do this, you are making your business a greater risk for the bank. The greater the retained earnings in the business, the less the risk there is for the bank. Banks do not loan strictly from the P&L; they also look to the balance sheet.

Cash Flow

Cash is the lifeblood of your business and understanding how cash moves in and out of your business is critical. Will your daily operations generate enough cash to keep the business running and repay debt? For new and small businesses, cash flow is one of the most important issues.

Business owners often think of net income as cash, but, as we have discussed, net income at the bottom of your P&L or income statement is not cash but the theory of cash. The P&L does not take into account your debt (principal) payments and owner’s draws on the business. Owners can be lured into thinking they are in a good cash position when in fact they are out of cash after paying debt and taking draws. Producing a cash flow projection helps to reveal what is really going on. Remember that account receivables are not cash; many businesses have gone out of business with account receivables on their books.

Because cash is so critical to staying in business, it always surprises me how few business owners produce cash flow projections. I had a client who was making money according to his net income line on the P&L, and he did not understand why he had no cash in the bank. Once we produced a cash flow projection, he could see how much he was spending to service debt and how his owner’s draws were affecting cash in his business.

There are only four ways to get cash in your business:

1. Cash from sales
2. Cash from borrowing
3. Cash from investment
4. Cash from sales of assets

The best way to sustain your business is to generate cash from sales because eventually you will run out of both investment cash and your ability to borrow more cash. Furthermore, cash from borrowing and sometimes from investment will create a debt on your balance sheet, and the repayment of the interest and principal on the loan or investment is a use of cash that will reduce your available cash for operations.

Here are some ways to improve your cash flow:

1. Raise your prices.
2. Sell more.
3. Invoice immediately for work performed or services rendered, reducing days to cash.
4. Collect your receivables at a quicker pace.
5. Get longer terms with your vendors.
6. Reduce expenses.

A note on inventory: While inventory is an asset on your balance sheet, it is also a use of cash since you have most likely already paid for it. The unsold inventory sitting in your warehouse or on your shelf has your cash tied up and that cash is unavailable for you to use for day-to-day expenses. Excess inventory can be a huge drag on your business and your cash. The numbers drive everything in your business, and understanding those numbers especially cash flow helps you ask better questions in order to make better decisions.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]

Make Your Banker Happy

10 Keys to Unlocking a Good Relationship with Your Banker

The various aspects of your business are like links in a chain, and your banker serves as one of those links. Because any chain is only as strong as its weakest link, it’s vital to develop an excellent working relationship with your banker, even to the point where your banker is a trusted advisor. In this book, a leading consultant who helps his clients generate dramatic results you will show you the keys to unlocking a good relationship with your banker.

As a business owner, your relationship with your banker is essential to your success. Follow our series on the website and get your desktop reference copy from Amazon.[/vc_column_text][vc_single_image image=”4854″ img_size=”full” alignment=”center”][vc_column_text]

Get Your Copy

[/vc_column_text][/vc_column][/vc_row]

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[vc_row css=”.vc_custom_1548289356400{background-color: #bcbcbc !important;}”][vc_column][vc_single_image image=”4853″ img_size=”full” alignment=”center”][vc_column_text css=”.vc_custom_1753306152698{padding-right: 19px !important;padding-left: 19px !important;}”]Never underestimate the role your banker plays in your business. As a business owner, it is critical to establish a relationship with your banker during good times, because when bad times come, as they always do, you will have that trusting relationship in place.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text css=”.vc_custom_1753306225448{padding-right: 19px !important;padding-left: 19px !important;}”]

Introduction: Through Good Times and Bad

Many business leaders attribute the success of their business to an innovative idea, hard work, and the right talent, and those are critical factors. One factor that is often underestimated is the role bankers play. When I was general manager and chief operations officer of a $40 million company with seven locations, I was responsible for the finance department as well as all other departments. One of the things I learned in finance is that you have to have a good relationship with your banker.

Our banker was essential to our success since business does not always go as planned. There were times when business dropped off and the relationship we had established with our banker kept us going. Since the relationship was long-term, they understood our business cycles and worked with us during tough times.

I speak with a lot of business owners and few ever tell me that they have a solid, ongoing relationship with their banker. Under those circumstances, my advice is always the same: You need to get to know your banker—now. Establish that relationship in good times because when bad times come, as they always do, you will have that trusting relationship in place.

To help the people I work with establish those relationships, I decided to go to the bankers themselves and find out what they are looking for in their customers.

I surveyed ten established bankers in the Portland, Oregon metropolitan area. These are bankers that typically work with small to mid-market businesses. The individual banker’s years in banking ranged from fourteen to almost forty years, with the average being twenty-four years. These are seasoned business bankers with a lot of business experience.

The sweet spot (where most of the customers are) for the bankers were businesses in the $5 million to $30 million range, and with two bankers working with clients up to $100 million in revenue and one working with clients with up to $75 million in revenue. However, all of the bankers are more than willing to work with smaller companies with good financials and business practices. Every one of the bankers interviewed likes working with companies with good values that are focused on making money and growing their businesses.

Based on the questions I asked, the responses fell into ten key areas that are part of establishing a solid, trusting relationship:

1. Financials
2. Credit
3. Communication
4. Business practices
5. Management team
6. Professionalism
7. Customer focus
8. Appreciation of the relationship
9. Being proactive
10. Succession plans

Their suggestions and guidance provide a blueprint for establishing the kind of banking relationship that will serve you and your business.[/vc_column_text][vc_column_text]

Make Your Banker Happy

10 Keys to Unlocking a Good Relationship with Your Banker

The various aspects of your business are like links in a chain, and your banker serves as one of those links. Because any chain is only as strong as its weakest link, it’s vital to develop an excellent working relationship with your banker, even to the point where your banker is a trusted advisor. In this book, a leading consultant who helps his clients generate dramatic results you will show you the keys to unlocking a good relationship with your banker.

As a business owner, your relationship with your banker is essential to your success. Follow our series on the website and get your desktop reference copy from Amazon.[/vc_column_text][vc_single_image image=”4854″ img_size=”full” alignment=”center”][vc_column_text]

Get Your Copy

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