If your budget shows you'll have financing needs next year, you better start talking to your lender now. Here's what they'll be looking for.
These days, discussions with banks about credit can feel like slamming your head into a brick wall. Conversations that were previously formalities are being drawn out longer and longer as lenders have become more risk averse. But, fear not, there are a number of strategies you can employ to ensure such talks about your 2011 credit needs are minimally headache inducing.
As Dale Shintani, senior vice president of small business lines of credit at Wells Fargo, says: 'What's important to understand is that we want to approve as many small businesses as we can.' In order for that to happen, companies must come prepared to bank discussions with complete accounting and budgeting information, verifiable data, and an open mind.
Securing a Credit Line: Be Open About Your Finances
When entering credit discussions with banking partners be as open as possible about the financial picture of your company. Many owners have shied away from such tough conversations about their credit or lending needs. That shouldn't be the case. As Shintani says: 'Business owners who talk regularly with their bankers are able to clearly explain the unique needs of their business and find the right financial solutions.'
Also, come prepared with accurate, complete records. Good accounting practices and information that is verifiable will help your lender not only in general credit decision-making, but also in selecting the right credit solution for your company.
Additionally, companies should look to banking partners that are the right size and complexity for the business, says Gregory Gould of the Maine Small Business Development Center in Auburn, Maine. 'If a bank is too small, it might not be able to meet your needs, and the same holds for a bank that is too big,' he says. 'From a borrower's perspective, you want to be able to lean on a relationship to help in good times and bad times. Finding a loan officer with decision-making authority at the level of your borrowing needs is crucial.'
While this advice may not help companies that are just trying to find credit anywhere they can get it right now, it is something to think about going forward. By choosing relationship banks carefully, and selecting a bank that provides a single point of contact—a single relationship manager that can be treated as a consultant as well as a credit manager--it creates a stronger bond.
Plus, what banks are looking for on the most basic level is assurance that the credit line will be repaid. By building a relationship over a number of years, it provides a history that gives the relationship manager confidence in the company when times are tougher.
Securing a Credit Line: Get Serious About Financial Reporting
Banks want accurate cash forecasting, and for executives and owners to have a clear understanding of their incoming and outgoing flows--and consequent funding needs. Christine Barry, senior analyst at consultancy Aite Group, notes: 'They are looking for businesses to move away from Excel spreadsheets and use more sophisticated tools. They want to see cash position reports, they want companies to perform what-if scenarios and do some planning around that.'
Banks want to see that companies are taking proactive steps to have a clear picture of existing cash and make the most efficient use of internal cash flows. One inexpensive and effective way to demonstrate this is to use the increasing number of forecasting tools that banks provide their banking clients—often free of charge.
Securing a Credit Line: Consider Alternative Funding Sources
Businesses can also look to other sources to reduce external funding needs, such as requesting credit terms with suppliers. Gould notes: 'Again, this is relationship based, so it is important to have a strong history with your suppliers for them to extend terms when you need it.'
Factoring—or selling accounts receivable to a factor at a discount--is also an option, albeit a costly one. But as Gould notes, it may be looked upon simply as an opportunity cost. He says: 'Even if you are out $100,000 and you only recoup $80,000 of it, given that you will get it quickly and given what can you do with that to create more cash and stay on top of expenses, it may be worth the cost. It is not a great long-term solution, but it can be a good cash-crisis solution.'
Shintani says that companies should also look at alternative sources of financing: 'In addition to a line of credit, business owners should consider SBA lending, micro-financing, or an equity partner.'
When it comes time to negotiate or renegotiate a line of credit with banking partners, every company will have a unique discussion based on its financial picture and credit needs.
However, it pays to be prepared and go into such conversations with a thorough understanding of the company's funding needs, a clear picture of cash flows, good accounting records, and a sound cash flow forecast with verifiable data. Having good record keeping and being open with relationship managers will make the discussion easier, and will more likely result in a positive outcome.