What Your Banker Knows About Your Business...THAT YOU DON'T

(and WHY You Should CARE!)

By: Lunelle M. Siegel

"Bankable" - adjective, noun.   Worthy of bank financing or a company that is worthy of bank financing.  "Companies less than three years in business are not bankable".

 

So, is your company 'bankable"?  Well the answer may be different tomorrow from today or today from yesterday.  But if you are serious about providing for yourself and provide for your family from your business..well.you might want care! Otherwise, you won't get the credit you need.when you need it.

 

Over the years I see business owners do things like, well, slide money out of the cash register, or deduct expenses on their tax returns to reduce their tax obligation.  That feels wonderful to the entrepreneur..at the time.  But the delayed consequences can be that in those actions, the business has become un-'bankable'.  And when credit is needed.it's simply NOT available.

 

What are the criteria that make a 'bankable' company?  Well there are many.  A basic one is the credit history of the business and its owners, generally assessed by the owner's credit score.  This is an assessment of how the company handles credit (as agreed or not as agreed).  Another is collateral, sometimes called a "secondary source of repayment" by bankers.  This is basically, a back up plan if the business can't pay the loan back out of profits.

 

There are a couple of financial aspects of a company that determine bankability as well.  They are what I call the "secret banker ratios."

 

Many business owners are aware of the importance of making money - Profit & Loss (P&L) management.  The P&L statement in a company, whether its the tax returns, or CPA prepared or company prepared statement, will be analyzed by the banker.  The 'bottom line' is can the company repay its debt load on the income the company reports (this is where the personal expenses and reduced revenue for tax purposes can really hurt bankability).  The analysis a banker will perform is called a debt service coverage, which will tell him if the business can repay his loan.  Here is his "secret" ratio, also known as:

debt coverage ratio

Cash flow available for debt service / debt service

 

Where the

numerator

(Cash flow available for debt service) =

Net income

+ depreciation

+ amortization

+ interest expenses

 

And the

denominator

(Debt service) =

Current loan payments (principal and interest)

+ Proposed loan payments

 

 

The result that bankers find acceptable vary, and frankly they change from time to time.  They vary from 1.25 on the low end, showing ability to cover debt with a 25% cushion, to 2 or even 3 times cushion.

 

Another "secret banker ratio" has to do with the balance sheet.  Very few entrepreneurs manage their balance sheet, but it does become important when seeking credit.  The balance sheet is a report of the companies assets, and how they are financed (either with debt or equity).  There is a test bankers use to measure the amount of assets that are financed by other people's money (debt) or the owner's capital and profits retained in the business (equity).

debt/equity ratio

 

Total debt / equity from the company's most recent balance sheet.

These numbers range from bank to bank and change from time to time, but it is unlikely for a bank to extend credit with the debt/equity ratio exceeds 5:1, and generally 3:1 is the max we see.

 

So, you can run the numbers using these "secret banker ratios" and see if you are 'bankable" or not.  If not, now's the time to start "managing" your P&L and balance sheet to become "bankable".

 

In the meantime, call Corporate Funding to arrange the financing you need from non-bank credit sources.

 

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