How to Borrow in tight times


2013

When you sit down with a financial institution, here are some of the things banks are looking for and questions they will ask.

Financial presentation: Be prepared to provide three years of business and personal tax returns as well as a most recent personal financial statement, and up to date balance sheet and income statement

Line of credit: If you are looking for a line of credit, plan on providing accounts receivable, account payable agings, and an inventory listing.
Side note – A lot of customers immediately think of a line of credit when looking to grow or expand. Take a few moments to decide if a line of credit is right for you and what you are going to do with it. A good banker will encourage you to use your line for working capital and short term purchases. They are not designed as a long term tool to buy a piece of equipment, which is what loans are for. This is a common mistake that businesses make and can cause financial issues when it comes to renewal since most lines of credit have a short “resting” period that makes sure you are not “living” on your line of credit.

Cash Flow: Banks get paid from your cash flow, not from collateral (and remember cash flow and profits are not the same thing). You must have a clear and demonstrated source of cash flow repayment from your primary operations to apply for a traditional bank loan.  The bottom line is that the financial institution just wants to be paid back.

Collateral: This is required as a secondary source of repayment in the event your primary operation (creating cash flow) fails. If you are weak in collateral, there are government guaranteed programs that may assist in providing a bank sufficient collateral to support your loan request, such as the Small Business Administration, and there is money out there to lend.

Capital: You need to have sufficient equity in your company. The capital level required differs from industry to industry and according to your size. You should know how leveraged you are in relation to your peers and what sufficient capital levels should be.

Character: Banks need to understand you and the story of the business. Has your company been profitable or have fallen on hard times? (…who hasn’t!) What is important for banks to see is what you did during those hard times? Other things banks look for is your 5 year plan and what your credit looks like.

Some say they hear that banks are not lending money. That is true and false. There are some banks that are going through hard times (like all businesses) and are not able to lend. However, the mass majority of institutions do have good capital levels and are able to lend at favorable rates.

This overview is provided by Paul Long, Timberland Bank  ptlong@timberlandbank.com

*Some information was obtained from Puget Sound Business Journal February 2012. Every bank is different in their lending approach; make sure you talk to your banker for more information.