How to Make Your Banker Mad
“A happy wife, is a happy life” is a very common saying in the world and I am going to add a new one for you business owners out there. “A happy banker is a happy life” (I know it doesn’t rhyme but, go with it)
I have been in the business banking arena for over 22 years and I want to share with what I have seen over the years that frustrates me and how you can learn from these, so when you go to see your banker they will be happy to do whatever you want. 😊
Down payment– One of the biggest things that drives a banker nuts is when people come in to purchase a building, vehicle, equipment etc. and don’t have a down payment. In essence you are telling the banker that you don’t want to take any risk on this purchase and that the banks should take all the risk. Well… it doesn’t work that way. From the banker’s point of view, this is not an attractive deal. Banks want to see 10-25% cash in a transaction, this way you have some skin in the game.
Now don’t get me wrong, there are some financing options out there that can finance 100% of an equipment/vehicle purchase and that is your choice, but remember being a highly leveraged company doesn’t make the banker feel warm and fuzzy when you need something from them.
How this benefits you: It is critical to the long-term success of the business to have positive equity on your balance sheet. When you finance everything you are creating a large debt load (what bankers call leverage) not only do you have high monthly payments, but you are not building your balance sheet equity which gives you a higher value when you go to sell your business.
“How much will you give me.”- If you want to be escorted out of your banker’s office quickly, go ahead and ask that question. For example: When applying for a line of credit, the banker will ask you, “How much you think you need?”. If you ask, “How much will you give me?”, you are essentially telling the banker that you have no plan, or that you haven’t put much thought into what is an appropriate amount to borrow. To greatly increase your odds of getting what you want, you should have an idea on how much you need, perhaps a budget, monthly cash flow analysis or something that says you thought about it.
There are many ways to calculate how much of a line you need. 20% of gross annual sales, 75% of your average accounts receivable outstanding, 2-3 months payroll just to name a few.
How this benefits you: Knowing exactly how much you need is important, so you don’t over borrower and should make you feel comfortable when that rainy day comes.
Using a Line of Credit, the wrong way– Many people don’t realize that there is a correct way to use a line of credit. A line of credit is used for short term working capital needs of the business. To cover payroll for a few weeks, pay a vendor to take advantage of discounts etc. A line of credit should never be used for long term assets like equipment purchases.
Here is the rule to keep in mind: If you are going to pay it off in less than a year, then you can take it from your line of credit. If it will take you longer than a year, don’t do it, get a term loan. Banks want to see you line balance look like a heartbeat.
How this benefits you: You don’t ever want to be in a position of needing cash and not having enough room on your line to pull from because you spent it all on items that don’t revolve.
Not understanding your books– Bankers don’t look for you to be an expert at finances, but we do want to make sure that you have a good accountant, bookkeeper etc. that will keep you on track. As the owner you should be reviewing your profit and loss and balance sheet several times a month. You should know what your gross sales, net profit and net income is at any given time, or at the very least, before you approach your banker to ask for a loan. How would you know the health of your business without knowing this? And how comfortable would you be loaning a person money if the potential borrower couldn’t, in any mathematical way, explain how they could afford to pay the loan back?
How this benefits you: Knowing where your business stands at all times is good to know if you have a problem in your business. How can you as a business owner fix the problem if you don’t know about it? What if its too late to fix it?
Not paying yourself– Bankers want to see you pay yourself something. Even if it is as low as $25,000 a year in W-2 wages. We understand that you may pay yourself in distributions or other ways, but make sure you talk with your CPA to make sure that you are maximizing your income and the tax consequences of whatever you choose.
How this benefits you: Having enough W-2 wages will help you when you retire getting proper Social Security and Medicare benefits. You must pay into the system in order to maximize your benefit.
Only seeing clients when they need something (visa-versa)- I love my clients… ok.. some more than others 😊 but it is critical that your banker is someone that you talk with more than when you just need something. If you think you are going to want to buy a building, a competitor or a big piece of equipment in the next 12 months, lets us know! We will work with you to make sure you are set up properly for that purchase. Also, make sure that you talk with your CPA about that as well so they can prepare your tax return(s), and you will be ready for that purchase before you ask for the loan. Being prepared in advance increases your chances of getting the loan approved. Remember banks want to see you make money (yes you must pay taxes) and you want to pay the least in taxes. Make sure you find a way to make both sides happy.
How this benefits you: How nice would it be when you go into your banker and tell them that you need something, and you are already pre-approved for what you wanted and the process is smooth and easy. No one likes surprises.