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What Your Banker Wants You To Know

What Your Banker Wants You To Know

In small or large businesses, we often end up dealing with banks and bankers beyond the checking account. When you have debt with your bank (your lender), the relationship takes on another dynamic. The typical loan agreement for traditional debt includes loan amount, terms, collateral provided, the covenants you must live by, and the dos and don’ts allowed. When things are going well, the relationship with your banker seems to always go well.  It is in difficult times that things get tough. Let’s look at what your banker wants you to know.

Growth is good, but it requires more capital to sustain. Learn about the 25 Ways to Improve Cash Flow (in addition to acquiring capital from the bank).

What Your Banker Wants You To Know

Your banks wants to know the bad new sooner than later. Furthermore, your banker does not want surprises. If you are having issues with your business, then discuss these early on with your banker. If you’re getting close to the limitations of your covenants, then let your banker know. In addition, if you see a change coming in your industry, then let your banker know early on. Be sure to give your banker the good news also. If you are planning on changes to Sr. Management, then mention these to your banker.

The banking world changes based on the economy, regulations, and markets. We remember 2008 when new credit at banking institutions basically shut down. Before that, it was fairly easy to get credit. And loan requirements were not as cumbersome – which is not always good. But the crisis caused a change in behavior at banks – some of it self implemented and some implemented by regulators.

In today’s market, money is still relatively cheap. There is an abundance of liquidity in the markets. So banks do want to loan money, but you must meet some basic guidelines.

What Your Banker Wants You To KnowWhat Commercial Banks Want

In order to loan you money, commercial banks basically want just a few things:

  1. They want to have collateral that secures their loan
  2. They want to know you have the cash flow to payback their loan
  3. They want to understand your business and they want to know what the funds will be used for
  4. They want to understand how much they will make $ on their loan to you

Different Types of Lenders

There are different types of lenders, including the following:

The cost of that capital goes from cheapest to most expensive lender on the list above. The structure of the debt also goes from easiest to most complex structure in the list above. Some want collateral (security), and some do not.

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Keep Your Eye on Your Debt Covenants

Most likely, if you have commercial debt, then you may have some debt covenants stated in your loan agreement. Covenants are the requirements you as the Borrower must maintain to be in good standing with your loan agreement.

Oftentimes, the bank and banker find out something is wrong when you turn in your financials and/or bank compliance certificate. They find that one of the covenants is out of whack. You may have a debt/EBITDA covenant ratio as part of your covenants. This is a common requirement. Do not wait for you to “bust your covenants” before you reach out to your banker. Monitor your covenants closely. If you see drivers in your business that may create a problem with your covenants, then reach out to your banker.

Renegotiate Covenants

Believe it or not, I have been in situations where the loan agreement is already a few years old. The company has become much more financially healthy, and I went back to renegotiate certain covenants to ease the reporting burden. The bank was very open to modifying some covenants. Usually, you have to be in good standing and have a good historical track record to modify or request to modify covenants. But do not be shy. Simply ask. The worst that can happen is your banker says, “no”.

Most bankers in today’s market do really care about the relationship, even at the biggest banks. Your banker does want to see you succeed. If you are living through troublesome times, then your banker does want to see you get financially healthy. But you need to communicate with your banker. The worst thing you could do is hide something from your banker or try to sweep something “under the rug”. That will eventually come, out and you will have burned a bridge with your banker. After you hide something, or if you do not disclose something, your banker will always carry that doubt in the back of his mind. And they may not be there for you when you really need to negotiate that debt covenant.

Are there other areas in your company that you can focus on to improve cash flow (outside of bank loans)? We have put together the 25 Ways to Improve Cash Flow whitepaper to make a big impact today on your cash flow.

 

What Your Banker Wants You To Know
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Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

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What Your Banker Wants You To Know

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Working Capital From Real Estate

See Also:
Balance Sheet
Current Assets
Working Capital
Working Capital Analysis
Current Liabilities
How to collect accounts receivable
Factoring

Working Capital From Real Estate Example: An Asset Based Lending Solution to Cash Shortfalls and Opportunities

Let’s look at a working capital from real estate example. Moreover, look at an asset based lending solution to cash shortfalls and opportunities

Problem in the Working Capital From Real Estate Example

Many companies own the land and buildings necessary to conduct the day-to-day operations of their business. Oftentimes, this valuable asset is included in traditional bank financing packages as the cornerstone of the credit facility. As long as the business progresses as the bank deems appropriate, and all loan and debt service coverage covenants remain in compliance, the real estate loan will serve to anchor the lending relationship.

Companies and/or individuals may also own commercial real estate which may provide an income stream or conversely, suffer from under-utilization and needed development. The banking community typically finances these transactions as a “onetime” advance. That advance is conditioned for certain renewal requirements. In addition, additional funding is triggered by developmental thresholds that have to be met. Additionally, the investment opportunity associated with these properties may require balance sheet leverage beyond what the bank is willing to tolerate.

More often than not, an adverse business or personal event occurs which places the commercial property owner in a position where cash is critical but not readily available. Such situations could involve the following:

  • Delinquent taxes
  • Tax liens
  • Legal expenses
  • Divorce settlements
  • Environmental issues
  • Any number of cash draining, unpleasant scenarios

In the first two examples cited above, the traditional bank lending relationship may deteriorate because of economic or bank regulation issues beyond the control of the borrower. The real estate may have appreciated in value since the bank extended the original bank loan. However, further leverage of that equity is not available from the bank because of payment default, covenant compliance or regulation issues with which the bank has to contend. In the third example, the bank is oftentimes prohibited by internal policy and regulators from extending credit for the purpose of satisfying such obligations.

Solution in the Working Capital From Real Estate Example

There are companies within the asset based lending community that can provide necessary funding to alleviate the cash shortfalls caused by the aforementioned problems. The asset based lender is more willing to look to the current appraised value of the real estate collateral to insure repayment as opposed to cash flow and financial statement strength. While loan to value percentages may be somewhat less than those allowed by the banking community, the liberal repayment terms and lack of covenant and compliance requirements afford the borrower the opportunity to alleviate the cash shortage and retain possession and control of the assets important to the well-being of the business and his livelihood. Some examples of the flexibility offered by an asset based real estate loan include the following:

  • Bridge loans
  • Interest only
  • Twenty-five year amortizations
  • Escrowed payment reserves

When cash is critical, and the options become limited, the appraisal value equity in commercial real estate can provide an asset based loan to alleviate the problem.

If you want more tips on how to improve cash flow, then click here to access our 25 Ways to Improve Cash Flow whitepaper.

Working Capital From Real Estate Example
Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Working Capital From Real Estate Example

See related articles: Mining the Balance Sheet for Working Capital

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