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Debt Compliance 101: Keeping Your Banker Happy

keep your banker happy

While Houston is mostly underwater from Hurricane Harvey that made landfall over the weekend, we are keeping our heads high and finding some purpose. Houstonians are going out of their way to save people, help clean up flood damage, and providing the necessities for their fellow neighbor. Similarly, you should find ways to keep your banker happy. They need certain things from you that only you can provide. One of the biggest ways you can keep your banker happy is by staying in compliance with your loan covenants.

What is Debt Compliance?

Debt covenants are used to protect the bank by implementing measures to ensure the bank gets paid at the end of the day. Business Dictionary defines debt compliance as “legal measures taken to ensure that borrowers repay their debts.” If you stay within the confines the bank has set, you most likely will not hear from the bank. But if you float between compliant and noncompliant or are simply noncompliant, you will face some consequences. Debt compliance is one of the best ways to keep your banker happy.

Floating between debt compliance and noncompliance? If this is you, then you need to free up cash within your business soon. Download our A/R Checklist to effectively collect your accounts receivable and manage your cash!

keep your banker happyNot Being Debt Compliant

Not being debt compliant means that you have broken debt covenants. But what exactly does that mean? Your bank, in the worst-case scenario, will call your loan. If being noncompliant is not a pattern for your company, banks do not generally want to take this route. Instead, they will likely freeze your credit line and you will need to survive off only the cash flow generated from your company’s operations. Just like Houston prepared for the worst-case scenario with Hurricane Harvey, you have to prepare like that too because the worst case might be the reality.

Keep Your Banker Happy

A client once told us that business was great. They tried to convince us that their Q1 numbers were looking good and would  still allow them to have healthy debt coverage ratiosBut their banker wasn’t so sure. Oftentimes in business, we look at just a sliver of information when we report the news – good or bad. But to protect themselves, the bank looks at a wide array of information. Their banker wanted more information and financials to ensure his confidence, even though the company reported reasonable Q1 numbers.

Maybe you are like our client, and you are experiencing misplaced pressure from your banker, or worse, perhaps your banker is putting pressure on you for good reason. As financial consultants who facilitate the relationship between a company and its banker every day, we know this dynamic very well. There are a couple things that you can do to keep your banker happy. These include considering your banker’s perspective, asking what they need, getting busy, and consistently checking in with your banker.

Consider Your Banker’s Perspective

Perspective requires effective communication skills and the ability to listen to what they are seeing from their viewpoint, not yours. If your local economy is encountering uncertainty, your banker is going to be more sensitive not just to your business, but to his or her entire portfolio. Even if your business is doing well, he or she may be facing pressure due to funds lent to other companies that are suffering. It’s critical to provide your banker with the confidence that your business is either (1) a-okay or (2) prepared to get better.

How can you best do this? Provide all the information they need to know where you are financially. Then, provide a plan to improve your business moving forward, even if your numbers are looking great. This extra step helps ease the stress and pressure the banker is facing. By going this extra step, you will be able to build the trust of your banker.

keep your banker happy

Ask What They Need

Let your banker know that you are prepared to provide cash flow projections, debt ratios, and more. Ask what they need from you to feel confident. You can do this by asking the following question, “what do you need to feel good about our company?” But the key is you have to listen to what they need from you. Oftentimes, businessmen and women think that asking the question will result in some brownie points. Listen carefully to what factors in your business scare them, encourage them, etc. Remember, do not assume anything.

For example, a client once went to the bank to discover that it was really uncomfortable with his lack of reporting. This lack of consistent and accurate data required the bank to just take the owner’s word for the numbers. But in reality, the owner didn’t have a grasp on his business. We partnered together to create a more streamlined accounting and reporting process. As a result, the bank felt a lot more comfortable with them and were even flexible in crunch times.

Get Busy

The best thing you can provide your banker is evidence that the bank’s money will be paid back. You provide this assurance with a plan. We suggest you provide dynamic cash flow projections to your banker. (Keep in mind, this is not easy). Bullet point the operational strategies that the company is using to make these projections a reality. Also include some financial ratios like the company’s debt service coverage ratio. Collect your accounts receivable to increase the amount of cash in your business. If you need help with cash management, download our A/R Checklist here.

Check In

Be sure to follow-up with your banker once you have provided all this information. Let him or her know how the company is on track (or not) with the projections and what measures you are taking to ensure the company’s financial health. Generally speaking, if you follow-up before they ask for more information, your banker will feel safe about your account. Just like in marketing or sales, follow-up is key for success.

Banker’s Reputation

Your banker’s reputation depends on your company’s success. Their job is on the line just like your company needs the lent cash to operate. Help keep their heads well above the water (last Hurricane Harvey reference, I promise). For more ways to add value to your company, download your free A/R Checklist to see how simple changes in your A/R process can free up a significant amount of cash.

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How to Get a Loan When Banks Aren’t Lending

how to get a loan when banks aren't lending

You need capital, but you’re having trouble securing the financing you need.  So how to get a loan when banks aren’t lending?

This situation reminds me of the famous NBC Television show, “The Office”, the hilarious documentary-style show that comments on the life of a standard corporate office. If you haven’t seen the show, I’d definitely recommend it.

In one of the episodes, the antagonist and regional manager, Michael Scott, has worked at Dunder Mifflin Paper Company for over 19 years and quits (spoiler alert!). He decides to start his own paper company with almost no capital, along with two other employees in the office who also quit. Slowly, he takes clients away from Dunder Mifflin and grows in revenues. As a result of his sudden growth in clients, he buys a van and wakes up at 3 in the morning to distribute the paper in the area.

After consulting with an accountant, he finds out that he has to declare bankruptcy because he was growing the business too fast, and that the revenues would not cover the growth of the business. They required wages, rent, and variable costs associated with manufacturing and distributing the paper. Because of the digital age, the demand for paper wasn’t so hot either.

What happens when we grow ourselves out of business? Michael’s problem was simple: he had no outside investors, and zero loans from the bank. Therefore, he had no money to cover the fast expansion. Sound familiar? In this article, we will discuss how to get a loan from the bank when they aren’t lending.

Don’t lose track of your company’s metrics. For advice on how to identify your KPIs and how to track them, access our free KPI Discovery Cheatsheet!

Bank Lending Cycle: A Recap

Last week, we discussed the bank lending cycle and why banks may tighten their lending. There are two reasons why that might happen…

Loans and the Economy

If the economy is undergoing or overcoming a financial crisis, banks tend to lend less. During this time, businesses might have to look elsewhere for financial assistance.

Conversely, if the economy is booming and the lending environment becomes less risky, banks might lend more. These periods are characterized by lower interest rates and better terms.

But what happens when things are looking up? It’s easier to obtain a loan because of the economy, but with all the capital in the marketplace, an economic bubble builds. After a while, that bubble will burst and we’ll find ourselves in a financial crisis again.

 The Environment affects the Economy

The economy may affect the environment, but the events in the environment also affect the economy. We used the housing market crisis in 2007 as an example. Imagine walking into your job the next day, without reading or watching the news, expecting to make a sale. Yikes! You have to know your environment to make good investment decisions.

How to Appeal to Bankers

We discussed the cyclical nature of bank lending and how to understand the industry. Now, we will analyze how to best appeal to the bankers. Regardless of the economy, the banker still has to evaluate how risky the investment is. What is the best way to appeal to bankers? Preparing a package of these five things will get you there:

1. Know your economics.

Preparing at least three years of business financial statements and one or two years of financial projections goes a long way. In addition, you should also list out how you will use the loan. By preparing a projection of financial statements, this should be easy.

2. Build sound business credit.

Knowing where you stand with your credit is useful. If there are any inaccuracies, you can correct them without having the bank check and deny you a loan. If you have lower credit than you had originally hoped, maybe you can hold off on applying for a loan until you are ready.

3. Provide documentation of personal loans.

Providing documentation of personal loans is equivalent to providing evidence and saying, “I am worthy of your loan!” Personal loans, business loans… they both demonstrate that you owe someone money, and showing the history of your loan relationships indicates the type of relationship you might have with the bank.

4. Prepare questions.

In a way, preparing a package for the bank should answer all the questions they might have. This includes “how much money do you need,” “how long might you need this loan,” “what will you use it for,” etc.

5. Log prior experience.

This is less about numbers and more about character. Logging your experience in companies, vendor relationshipslender relationships, and references shows more than how much money you have or will have. It shows the commitment and effort of a borrower.

Other Sources of Loans

Don’t put all your eggs into one basket. Have a backup plan just in case banks really aren’t willing to loan anything to your company. Smaller businesses are less likely to obtain a large loan from a bank if they are less than 10 years old.

SBA Loans

SBA is the Small Business Administration. They provide loans if you’re starting up a new company, or even if you just want to expand your business. Basic 7(a), Certified Development Company (CDC) 504, and the Microloan program are examples of the loan programs they provide.

Personal Loans

It may not seem much, but $20 from your family members adds up. Using your savings and other means of personal loans, you can finance yourself through startup costs. Just make sure not to forget about your payments, or run your credit too high!

Conclusion

In conclusion, banks won’t loan to just anyone… and sometimes that’s not your fault. Sometimes, it’s just bad timing. What happens in your environment isn’t up to you, but it is your responsibility to stay updated on those facts. Creating a package for your business will increase the likelihood that you’ll get a loan because you’ll be making the bank’s life easier. Rather than them scrambling to find your information, you can simply lay it out for them. And if all else fails, banks are not the only source of loans. With a bit of ingenuity, you can get there.

Save your time and prepare for the future now. Know your numbers and where your company is the weakest. The best way to start doing that is to download our KPI Discovery Cheatsheet today!

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Bank Lending Cycle: Cracking the Code

bank lending cycleSo your cash is tight and your loan renewal is approaching, but sales are picking up and you need additional capital to keep up the pace.  You approach your banker about increasing your line or obtaining new financing and they aren’t willing to take the risk. What now?

This isn’t a new story. In fact, if you’re in finance, either you or the person in the office next to you has experienced this. In this blog we’ll give you some general guidelines on what to watch out for in the bank lending cycle.

What is the Lending Cycle?

After a financial crisis, banks tend to tighten up their loan underwriting making capital more difficult to obtain. During this time, businesses seeking additional sources of funding will likely face an uphill battle convincing their lender that they are a risk worth taking.

As the economy improves and the lending environment becomes less risky, credit structures begin to soften and financing becomes easier to obtain.  These easy-to-borrow periods are marked by lower interest rates, lower requirements and conditions, and a large amount of available credit.

Not surprisingly, with all the new capital in the marketplace, an economic bubble builds. Eventually, the bubble bursts causing another financial crisis and the cycle begins anew.

When determining whether or not a banker wants to lend to you, they usually evaluate how risky the investment is. Obviously, banks do not lend to anyone and everyone. Rather, they calculate how much of their lending is trustworthy. What is this company’s credit history? What other debt do they have? How are their financials?  These are just a few things that a lender evaluates before making the final decision.

Why is the bank playing hard-to-get?

As a business person, you’re probably familiar with how “flirty” a bank can get with you. When you actually need the loan, they don’t want to give it to you. Then they tease you with a good rate and terms when you don’t need the loan. This isn’t just because you walked in wearing the wrong clothes, or even because of your numbers. Sometimes, because of the bank lending cycle, it’s just more difficult to get a loan at that time.

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Loans and the Economy

In one of our Wolff Center for Entrepreneurship classes, I asked the question: “Is it a good idea to start a business in a recession? Raise your hand if you think it is.” Only a few people raised their hands. In a way, it is a good idea, and this is why:

Like any product in the economy, prices and rates fluctuate due to supply and demand. When the demand is lower for a loan, banks are more inclined to charge a lower interest rate. When demand is high, banks implement a higher interest rate. During a recession, businesses are more debt-averse, driving down interest rates. When rates are low, there’s pretty much a “discount” to take out a loan. And every entrepreneur loves a discount.

Similar to demand, supply also affects the interest rates for a bank loan. When banks are flush with cash from customer deposits, they need to put those assets into service in the form of loans.  With lots to lend, banks tend to offer more attractive credit terms and interest rates. When the economy is suffering and banks don’t have as much on deposit, the supply of capital is diminished and, consequently, is more expensive.

The Environment affects the Economy

This is why it is crucial to understand the environment and industry your company is associated with. It amazes me how many people conduct business without reading or looking into their industry’s current events. Those current events affect what sale you’re going to make, how cheap your supplier will sell you a part, and… whether or not it will be possible to get a loan.

Imagine walking into work a day after the housing market crisis in 2007 and saying, “I’m going to invest in a condo.” Assuming you’ll still have a job at that point, anyway. If you take away anything from this article, understand this: Stay updated in your industry, because those events directly affect the economy.

Loan Officers are Actually Salespeople

bank lending cycleLoan officers are people who recommend consumer, commercial, and mortgage business loans for approval. They typically work as intermediaries for the bank lenders and the borrowers. A person represents an entity, and promotes a product for a commission… sound familiar?

Loan officers are really salespeople selling loans. They have quotas like salespeople. When there is low demand or availability of capital, loan officers are often less aggressive or even laid off. This is similar to a salesperson who is laid off due to a decrease in revenues. When capital is flooding the market, banks will often hire hoardes of new loan officers to put their money to work.  This explains why your banker rarely calls on you when you really need them but pursues you doggedly when times are good.

Conclusion

In conclusion, the economy affects the bank lending cycle. It may seem like common knowledge to stay aware of your industry, but you would be surprised how many clients I meet that have no idea what is really happening in the world. If you understand the economy, then you’ll understand the patterns of what a bank needs. A bank is like a business, so if you start thinking like a bank (which you most likely already do), then you’ll be speaking their language in no time. Catch next week’s blog about how to appeal to your banker, and how to get a loan even when banks aren’t budging.

What do you do when your banks aren’t budging? Now’s the time to really think like a CFO. Download our three best tools in the company to start speaking the CFO language.

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A Tale of Two Bank Accounts

technology substitutes bank accounts

Do you ever have those thoughts that haunt you in the middle of the night? Well, for me, it was 2 AM one night and I thought to myself, “Why on earth do I have two bank accounts?!”

As time passes and technology progresses, the need for multiple bank accounts seems irrelevant. Think about it – you have twice, maybe three times the burden of maintaining, tracking, and paying for multiple  accounts. There are many reasons someone would want to, so let me share mine with you.

Reasons for Having a Separate Payroll Account

Security

Assuming you hand out physical checks to your employees, having a separate payroll account can keep employees from having access to your operating bank account number.  Since most payroll accounts are only funded at the time of a payroll run, the company’s dollar exposure to theft is limited.

Separate accounts for payroll and accounts payable enhances internal controls and enables the company to choose which individuals within the company have access to the bank accounts.  The person processing A/P checks might not be the person you want having access to your payroll account.

Hacking is also a major issue, especially in finance. Many people believe that a second bank account will make sure payment is available only when needed. In case of a frozen bank account, lost credit cards, or stolen identity, a separate bank account is a good fallback.

Organizing Tasks

If you have many employees and many vendors, reconciling one account with all transactions can be messy.  Having separate accounts for payroll and operating expenses can streamline the reconciliation process.

Having a separate payroll account also makes it easier to locate lost, stolen or forged payroll checks.

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Our Thoughts…

A business may have good reasons for separate bank accounts, but here are a couple of reasons why you might reconsider.

1. Electronic Payroll Processing

In the old days, you only put enough in payroll to prevent fraud, make the bank reconciliation easier, and limit authority. You can do this all electronically now. There are apps and websites available to help with payroll. Additionally, they include fraud prevention and aid with taxes. The need for a separate bank account with manual tracking is obsolete, because technology has your back!

2. Apps to Deal with Operating Expenses

technology substitutes bank accountsYour operating account generally handles customer deposits and vendor payments. Businesses
may also use this separate account to pay for other overhead expenses such as sales dinners, store purchases, etc.

But again, technology has simplified this process. I attended a conference a couple of months ago, and one of the vendors focused on automating day-to-day transactions within companies. Many vendors offer auto-draft and many customers pay via ACH.

Accounting software such as Quickbooks interfaces directly with your credit card account allowing you to automatically upload, code and approve transactions in minutes rather than the hours it took just a few short years ago.

There are many more reasons to have multiple bank accounts, but many more reasons not to. For every new bank account created, there are hundreds of apps and websites to serve the same purpose.

Embracing Change

Speaking of change, you should reconsider the way you’re doing things since times are changing. Are your business habits the best practice? I’m 60 years old. There, I said it. Yet I work with young entrepreneurs every year. Why am I 60 years old and thinking like a baby entrepreneur? Because I made the conscious decision to adapt and change. You can, too.

“That’s cute, but don’t tell anyone about it.”

Ever heard of Kodak, and how it failed? Kodak is a perfect example of how missing your technology window might destroy you in the long run. In 1975, Steve Sasson invented the first digital camera. However, management replied, “That’s cute, but don’t tell anyone about it” (via The New York Times). Not long after, Sony came out with the first digital camera to be sold.

What might have happened, if Kodak actually supported the new digital movement? Could they have avoided bankruptcy and held onto their status as an industry leader? They might have been the company to look to for more technologies, but instead, the management of Kodak was in denial. We can all learn from this, and trust technology to handle some of our business.

Don’t be a Luddite

In my experience, many financial leaders are late adopters of technology. If there is a new and easier way to implement a task, the financial leaders are the last to get on board. Imagine how that trickles down throughout the business – the managers are the last to implement the change, the employees, and then the customers. Pretty soon, you’ll be irrelevant compared to the competition. How do we stay relevant in our industries? By adapting to change.

As we explained in our blog, “Are you a Luddite?” technology is not stealing jobs, it is creating new roles. Technology can eliminate the need for multiple bank accounts and make things easier for you. Don’t make things more complicated for your business than you need to!

Conclusion

The technology movement is a hot button topic – even when discussing multiple bank accounts. This is because there are so many technologies for so many purposes.

Depending on your business, you may need to open another bank account. Whether you have another location, or if you have a separate entity under your business, you may consider this option. However, you’ll be paying extra bank fees, manually tracking double the account activity, and reconciling twice as many accounts. Your business should grow, not the number of accounts you have to fund it.

Take a chance, make a change. Download our 3 most powerful tools and help advance your business! 

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More Questions Your Banker Wants Answered…

monopoly bankerIn a recent post, I talked about a conversation I had with our banker and the three questions she’d most like answers to.  In case you missed it, her questions were…

  1. How are you feeling about your business and the local economy?
  2. What is the outlook for the rest of the year?
  3. What are you doing about it?

More Questions Your Banker Wants Answered…

In response to the article, several of you reached out with questions of your own to add to the list.  Not surprisingly, the questions largely focused on what is going on in the Houston economy right now as a result of the decline in oil prices. Here were your thoughts:

1.  How is the current economic situation impacting your specific industry?

If you’re doing business in Houston you’ve likely felt (or will soon feel) the effects of the drop in oil prices.  Even if you’re not in the energy sector, your banker wants to know that you’ve taken a look at how the economic situation may affect you.

2.  What are the recent trends in your industry that impact your operations?

What other trends are affecting your industry?  Government regulation, increased competition, technology, substitution, etc.?  Your banker wants to know what your plan is to deal with these trends whether it entails mitigating risks or exploiting a competitive advantage.

3.  What are your 5- and 10-year goals and what are you doing today to achieve those goals?

It’s important to your banker to know where you’re headed in the long-term.  It’s easy to get wrapped up in the day-to-day operation of a business, but your banker wants to know that everyday decisions are made with the bigger picture in mind and not just reactions to the situation on the ground.

In the original article, I talked about the 5Cs of credit and how Character was the most important “C”.  Based upon your comments, I’d have to say that Conditions may be of greater importance (or at least more immediate) to you in the current economic climate.

Thanks so much for your feedback!  I’d love to hear what other questions you have.

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3 Questions Your Banker Wants Answered

3 Questions Your Banker Wants AnsweredRecently, I had lunch with our banker.  During the meeting, I asked her what she wanted to accomplish when meeting with her customers.  She said that she wanted to know the 3 questions your banker wants answered…

3 Questions Your Banker Wants Answered

1.  How are you feeling about your business and the local economy?

Have you felt the impact from the changes in the local economy and, if so, were they good or bad?  Has there been any fallout with your customers?  How are your competitors reacting?

2.  What is the outlook for the rest of the year?

Do you see the local economy getting worse, recovering, or staying flat?  What forces or drivers do you see influencing your outlook?  What local indicators are you watching?

3.  What are you doing about it?

What actions have you already taken to address any impact?  Have you identified your next steps?  How will those actions impact the financial statements?

In establishing banking relationships and making loans, bankers look to the 5 Cs of Credit for guidance.  The most important of those Cs is Character.  Character covers not only your personal character but also your business competence.  It also covers your management team.

When market conditions fluctuate, bankers want to know that you and your team are strong enough to navigate the rough waters until the economy recovers.

The challenge for business leaders is to be optimistic without being naive;  realistic without being pessimistic.

How are your conversations going with your bankerLeave us a comment below.

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Managing the Banking Relationship in a Growing Market

extending lineBusiness is rarely easy.  Even in a growth market, there are still challenges.  They are just different challenges than in a recession.

Managing the Banking Relationship in a Growing Market

In Houston, we are seeing companies who are continuing to grow and generate cash. As they seek to expand their operations and invest in infrastructure, they are running up against the debt limits set by their bank. Right now, banks want to lend money!  That is how they earn a profit.  Unfortunately, a lot of companies are not making it easy on them.

Pursuing an aggressive tax-minimization strategy may generate cash to a point, but makes it difficult for banks to lend the company money once the tax savings aren’t enough to fuel growth.

Companies who violate the concept of sustainable growth, by borrowing more than the company’s internal growth rate can sustain, tie their banker’s hands and often make it necessary to seek sources of funding outside their bank.

Another obstacle for the bank loaning more money is the regulators.  Since the financial meltdown, bank regulation has increase dramatically and the banks have to keep the regulators happy.  We’re finding that in order to get more leverage, companies often just need to address the bank’s issues in a manner that makes sense.

Bankers hate surprises. Consequently, the key to a successful banking relationship is communication. Openly communicating your plans with your banker not only gives them confidence that you know where you are going, but gives them the opportunity to help you get there.

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