With the economy improving, and businesses growing again, cash flow can become an issue. To grow your business, cash flow is important; however increasing cash flow is easier said than done. To find out what it takes to get financing in this current economic climate, I spoke with a local banker. Here’s what he had to say: What do banks look for in financial statements? Prior to the great recession, bankers looked at financial statements to see what collateral the client had. Since the great recession, they look at the balance sheet to see what debt there is against the company. When looking at the P&L, year over year trends are extremely important. For those companies in seasonal businesses, bankers will specifically hone in on specific time periods. The good news is, they will take into account “one off” expenses, that they will add back to the P&L. One off expenses could include moving or remodeling expenses. When looking at the balance sheet, tangible net worth is also a huge factor. When looking to increase my line of credit, what do you suggest? To increase cash flow, you have to cash flow… Go figure. Cash is king, and year over year growth in revenue is key. Banks are also still looking for collateral. If you are looking for a 250K line, the bank wants to see you that you have 250K in accounts receivable, inventory or equipment for instance. Collateral is not black and white. You must personally guarantee the money and show good faith. In CA banks can either use your business or personal collateral, not both. Typically banks won’t use personal assets for qualifying. You will always have to put a personal guarantee, but they won’t lien any personal assets. Main factors that the bank looks at:
  1. You need to pay Uncle Sam, aka, business needs to show a profit.
  2. Personal credit is very important.
  3. Cash flow, credit relationship with the bank (prospect or customer), you have a much higher chance of getting approved if you are a current customer.
  4. Collateral – you need to put some skin in the game.
If you don’t have all 4, there is still a chance you can qualify. Credit is one of the most important parts of the equation. If you do have bad credit, they’ll look at what’s on the credit report to make the decision. Have a bankruptcy? Chances are you’re out of luck, especially if the bankruptcy was with their bank. They also don’t like to see slow pay or late pays in your history. If you do have bad credit, reestablishing your credit is crucial. Other points to note, banks will not lend in 2nd position. If you have a UCC (a lien) that’s a deal breaker. The bank will have to refinance the debt in 1st position to be able to give the new request of what you’re looking for. Your industry type is important too. Typically banks don’t like retail. They do however like manufacturers, distributors & wholesalers and professionals (CPAs, lawyers, doctors etc). Other things that will work in your favor – time as an owner, tangible net worth, equity position and multiple companies included on a deal. Hopefully these tips will give you a heads up on what to put in place prior to looking for financing. If you have any questions or need to be referred to a banker, give me a call today. By: Kim Onisko