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Is Your Business Bankable?

Is Your Business Bankable

Businesses call us for many reasons but here are two very common reasons why we get called…

They are growing and want to strengthen the financial function.

OR

They are in financial distress and can’t find a way out.

Why does a business need to be bankable? What does being bankable mean? In this blog, we are going to answer all those questions and advise you how to strengthen your banking relationship (something all businesses need to do).

What metrics are you using to gage your company’s performance? It’s important to identify and track those KPIs. Need help tracking them? Click here to access our KPI Discovery Cheatsheet, and start tracking those KPIs today!

Is Your Business Bankable?

Before we answer the question “is your business bankable?”, what does bankable even mean?

Bankable is a financial jargon that indicates that a business is sufficiently healthy to receive interest from lenders to loan. It’s a basic indicator of a company’s success. If a bank is willing to loan a business cash and/or support a business, then the risk of it failing or not paying is low. A bankable company has significant assets, profits, liquidity (cash), and collateral.

An article from Forbes says it like this, “The bank is your cheapest, but often most difficult, source of capital with which to operate and grow your company.”

So, is your business bankable? There are several things to consider.

Financial health will be the primary focus of determining if your business is bankable. There are other things, such as collateral and the character of the person, behind the loan.

Financial Things to Look for

Financial things to look for:

Non-Financial Things to Look for

Non-financial things to look for include the following:

  • Do you have a strong management team?
  • What does your industry or segment look like (strong, declining, etc.)?
  • Do you have a business plan?
  •  The character of the people behind the company and signing the loan documents
  • Will you provide a personal or corporate guarantee?

If you are unsure, then just ask your banker.

Is Your Business BankableThe Need to be Bankable

We deal with companies that are both highly successful or maybe in a distress situation. If you are successful, then you may want to acquire another company, have a distribution, or invest in CAPEX. In today’s market of relatively cheap access to capital, why would you use your own cash? If you are growing, then you really need to consider a line of credit to help you grow. We see very successful companies in a high growth scenario bleed out of cash and working capital. In those cases, a line of credit would make life so much easier.

 Click here to access our KPI Discovery Cheatsheet, and start tracking your progress to be bankable!

Bankable Business Plan

Now, that you have determined if you are bankable or not bankable, it’s time to put together a bankable business plan. There are several things that banks (and investors) want to see before they invest in your and your company. There are ten sections to a bankable business plan.

(HINT: If you do not have a good banking relationship with your banker, then even the most perfect business plan will not guarantee you will get the capital or line of credit you need/want.)

Value Definition

What ares in your business create value? In a bankable business plan, you need to define your value-generating centers (core-business activities). A successful business will continue to come back to the value that they provide to customers; however, an unsuccessful business will continue to get distracted by other areas of the business that are not generating any or as much value.

Needs Assessment

A Needs Assessment identifies the company’s priorities. It also defines what needs to be accomplished and the steps that need to be taken to achieve the goals. This is a great tool to use to identify what you know and don’t know about your business. Use this process to analyze every part of your business. Score.org provides a Needs Assessment that will gage how well you know your business and your needs.

Differentiation and Competitive Assessment

Porter’s Five Forces of Competition is used in the differentiation and competitive assessment to identify competing products/services and to start the process of differentiating yourself from the competitors. For example, there are 3 companies in Houston that provide the exact same product; however, ABC Co. is working to be bankable. So ABC Co. works to position their product differently and to provide more value than their competitors. Without conducting a differentiation and competitive assessment, ABC Co. risks loosing valuable market share.

Market Analysis

Bankers want to mitigate their risk. Conduct a market analysis to explain exactly that your market is doing. Is it new and expanding? Or is it saturated and declining? This will help explain your company’s growth potential.

Marketing Planning

Put together a marketing plan. Identify how you are going to market your product or service, what your target market is, and how you are going to continue to grow.

Sales and Promotion Strategy

Now, that you have built out your marketing plan, identify your sales and promotion strategy. For example, if a $1 trial for a subscription is critical to your sales strategy, then write that out and explain how it has contributed to your company’s growth.

Organization Design

What does your organization look like? Are you bombarded with too many non-essential personnel or administrative functions? Or is your company designed to optimize all positions to cover both value-adding functions and administrative functions?

Financing Needs

Identify your financing needs. How much do you need to sustain your company? How quickly do you need financing? Answer all this questions

Financial Projections

Next, build out your financial projections. Be sure not to have optimistic projections that are hard to near impossible to accomplish. They need to be realistic, detailed and logical.

Risk Analysis

Finally, what risk does your company have? For example, a company who relies heavily on the oil and gas industry needs to identify what risk they will face if that industry declines.

Conclusion

In conclusion, being bankable is a measurement of success. As previously stated, there are several things you need to watch to remain bankable and profitable. Measure and track those KPIs. Click here to download our free KPI Discovery Cheatsheet.

Is Your Business Bankable
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Is Your Business Bankable

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Key Elements When Seeking Financing

key elements when seeking financing

This past week, one of my clients met with a banker to develop a new banking relationship. He hands the banker the company’s financial statements, expecting the banker to look at the income statement. Instead, the banker flips to the back of the financial statements to look over the balance sheet. As the coach, I asked my client, “See what he just did?” Most financial leaders (and the owners of their businesses) are consumed with their income statement but the banks want to know are more interested in how leveraged their banking client is. Not surprisingly, there are a few key elements when seeking financing for companies to follow.

Key Elements When Seeking Financing

Every company cycles through good and bad times. Depending on what part of the cycle your company is currently in, your banking relationship may be influenced. There are some key elements when seeking financing that will keep you on the good side of your banker.
Identifying your KPIs is a critical piece of the process when seeking financing. Want to find your KPIs and learn how to track them? Access your free KPI Discovery Cheatsheet today!

Leverage

What is leverage? Financial leverage is the use of borrowing from the bank to offset the cost of sales. Many companies hope to borrow just enough to increase their capabilities to sell more. But if banks see that you are too highly-leveraged, it’s bad news!

As a key element when seeking financing, leverage is important to have as it provides credibility to your borrowing experience. A banker will see that you have maximized the potential of previous capital to increase sales. The “kicker” here is if you have failed to optimize the borrowed capital potential, then the bank is going to be more prone to backing out of (or not starting in the first place) a banking relationship with you.

Cash Flow

We say it often and we say it loud… Cash is king. Without cash and/or liquid assets in your company, the bank is going to turn its nose up at you. Be sure to communicate the availability of cash in your company. For example, if a friend asked you for $250,000 but had no way of paying you back, you would be wary and decline the ask. This is because there is no hope that you will get the money back that you loaned. The bank acts in its best interest.

Make it easy for the bank to make a decision. Communicate through the financial statements (especially the balance sheet) the availability of cash.

Not About Price

Oftentimes, business leaders think that the bank cares about the price of your product. They don’t. To the bank, price is the least important factor in their assessment of your company because money is a commodity to them. Price is immaterial.

When meeting with a banker, communicate the bottom line and what’s on the financial statements NOT how you price your product. The bank is not your business consultant. They have to make money off of you.

Creating a Banking Relationship

When seeking financing, it is essential to create a banking relationship. You wouldn’t get married to the person you passed by on the sidewalk, so why would you get into a banking relationship with someone you have zero connection with. There are a few things that you need to look for to have a successful banking relationship.

What to Look For

If you are just starting out in a new city or have no relationships with any bankers, one of the first things that you can do is connect with people that do! For example, as a consultant, I have multiple relationships with various banks. When one of my clients needs a banker, I make the connection. People love feeling like they have it all, so give them the benefit and ask for help.
key elements when seeking financingLook at the bank for their philosophy and how they take care for their customers. In addition to philosophy, look at their morals.
Some questions to ask your banker in the “dating” stage include:
  • How long is a typical relationship with your customers?
  • What are the communication boundaries?
  • What is the bank’s view of breaking debt covenants?

Relationship or Transaction

Another important question you need to ask yourself is: “is this bank looking for a relationship or a transaction?” If you answer the latter, then you are just commission to them. When times are rough, you’re going to get cut. But if the answer is a relationship, then you’re looking at a long healthy marriage.

Relationships are absolutely critical in business. Value these relationships and take care of people. It will reflect in your business.

How does the bank deal in times of crisis?

A few years ago, I had a client that went through a period of stress. In the last quarter of their fiscal year, the business was growing and was doing well. They had 4 quarters of decline, but had tracked their KPIs. Although they had broken a few debt covenants, they were tracking their progress carefully with the bank. This client had a strong relationship with their bank. Without that relationship, the bank would have taken my client to the “workout” group.
Don’t have KPIs to help your banking relationship? Learn how to identify your KPIs and how to track them with our free KPI Discovery Cheatsheet. Click here to download your cheatsheet!
When you stub your toe, how does your bank react? Are they willing to let you slide on debt covenants for a few quarters as long as you have a plan to get out of the downturn? Often, people don’t see the importance of knowing how your bank is going to react in times of crisis. The economy continually ebbs and flows, changing for good or for bad.
Also, how does the bank deal with growth? You need more financing, but you are breaking covenants. Are they willing to provide financing with the knowledge that things won’t pick up immediately?

 The Workout Group

Several years ago, the bank wanted to meet with another of my clients because they had broken their debt covenants. The client calls me after meeting with “great news”! He said that the Bank had offered to work out his problems in the workout group. This “workout” group isn’t to work out your problems and put you back on track. It’s to work you out of the bank. This is not a good thing.
You don’t think your house will ever burn down, but what happens if your house does burn down? You don’t think you need a bank to weather the storm, but what happens when you need the bank to weather the storm with you? Assess whether or not your current banking relationship will be your insurance in the case of a fire or storm.
One way to do this is to look at the bank’s philosophy of business and their internal culture. How tight are they with the rules? Are they willing to stretch a little on their debt covenants and step up to help in times of distress? My client’s bank was unwilling to stretch its debt covenants. Instead the bank just wanted to wipe their hands clean of my client and move on to the next sale.
This willingness to be flexible all boils down to relationships. I have to warn you though, not every bank is similar in their goals.

key elements when seeking financingGet in Line

To prevent being put into the “workout” group, it’s crucial to start out on the same page. Get an alignment of interests, philosophies, culture, and anything else that would impact your company.

Interest and Philosophies

If the bank is only interested in their bottom line, then it may not be a good fit. If the bank is truly invested in your company and is willing to help you out in any reasonable way, then it’s a perfect match.

As I’ve built The Strategic CFO, it’s been a priority of mine to create relationships with bankers as they are going to reap the benefits of my clients doing business with them and I value their expertise. As a result of our mutual interests, the bankers in my network continually push potential clients towards my consulting practice. Those bankers and I have a strong relationship where we understand each others’ needs and desires as well as feed each other.
Of course though, I have had bankers tried to take advantage of my generosity and not return the favor. As a result, those relationships did not last long. It’s all about getting ones’ interests and philosophies in line.

KPIs That Influence Debt Covenants

Banks monitor your debt covenants. To help them (and you) out, identify KPIs that influence debt covenants to help track where you are and where you’re going. Picture this, your significant other or spouse comes home and lets you know that they’ve purchased a house, car, and boat without ever discussing it with you before. If you’re like me, I’d be surprised and would want to control the situation. If your significant other continues to make extravagant purchases or decisions without your prior knowledge, you would have trust issues and may want to cut up their credit card while they’re sleeping.
People see banking relationships as far-off and a different type of relationship. But the truth is, it’s all the same. Relationships are relationships. If you or your company or your significant other continues to create negative surprises, it’s not going to help with the relationship.
First, fix the problem before it becomes an issue. As soon as you see a yellow flag, jump on it!
Then after you fix it, let your bank know what has happened and how it has been resolved. This not only comforts the bank but builds trust. If the yellow flag starts turning red, alert the bank and outline the consequences. This helps you prepare and for the bank to prepare. Procrastinating this step can result in devastating consequences. The bank may be able to help you if you give them enough time.
Start identifying and tracking those KPIs that influence your debt covenants. For help and tips on how we measure KPIs, download our KPI Discovery Cheatsheet today! Know your numbers and where your company is the weakest so that you can start turning around your future.

key elements when seeking financing

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Key Elements When Seeking Financing

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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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3 Questions Your Banker Wants Answered

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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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Manage your Banking Relationship

See Also:
Financial Jargon
Categories of Banks
Finding the Right Lender
Funding Source Versus Lender
Interest Definition
Is it Time to Find a New Bank?

Manage Your Banking Relationship

In order to manage your banking relationship a key strategy is to establish lines of open communication with your banker. Treat them as your friend instead of an adversary. If you are in danger of breaking a covenant, you could very well have a much better experience if you make the banker aware of the potential problem than attempting to hide it or delay breaking the news. The earlier the banker is aware, the more likely it is that they can assist you in mitigating the problem and finding a suitable solution for you both. In addition, the more trust you build with your lender, the easier it may be for you to borrow in the future as your needs change.

Managing your banking relationship is a part of being the trusted advisor to your CEO. Learn how you can be the best wingman with our free How to be a Wingman guide!

manage your banking relationship

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Choosing a Bank

See Also:
What are the 7 Cs of banking
Categories of Banks
Finding The Right Lender
How Important is Personal Credit When Negotiating a Commercial Loan?
Bank Reconciliation

Choosing a Bank: Which Bank to Choose?

I was involved in a speaking engagement recently with my friend, a banker named Larry from Community Bank located here in Houston. After our talk a gentleman from the audience, Al, asked us “Are banks different and if so, which one should I choose?” Larry answered first and after his response all I could say was “I agreed.”

Larry started by saying “Yes banks are different.”

He continued by telling Al that “Part of my answer I know you didn’t request but it is necessary information you need to consider.”

“To answer your question I feel that it is essential for small business owners to write out what they want and need from a bank. This is no different than having specific criteria or objectives in looking for an employee. What do you want the banker and bank to do for you and your business? Then, as you interview banks tell them what your needs and expectations will be and that you require them to be met. Larry stressed this point “Voice them now or be sorry later!”


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5 Considerations for Choosing a Bank

Larry went on to say that for larger businesses there are 5 primary areas of concern that need to be questioned during the process of choosing a bank:

1) Financial Standing

Review the bank’s financial statements. If the bank is a public corporation their financial information is available at www.sec.gov. If they are a private company their financial information is available at www.fdic.gov. Your areas of concern while looking at the financial information are: a) is the net worth of the bank increasing annually, which usually means they are making a profit and b) are bad loans increasing or decreasing. Ask the banker why there are changes in the net worth or bad loans because, rest assured, the banker will ask you why there are changes in your business. Just like a bank will not loan you money when your company is losing money, you do not want to be involved with a bank that is making poor business decisions.

2) Community Standing

What is the perception of the bank by leaders in the community? Talk to business leaders in the primary business sectors, such as real estate, retail, wholesale. Or even to your competitors who may be customers of the bank you are considering.

3) Lending Appetite by the Bank

Larry said “Al, there are two concerns in it this area you should address.”

a) Risk appetites (tolerances) – You need to ask the banker the bank’s lending philosophies, such as loan advance percentages against collateral and loan policies to make sure your business fits within what the bank wants and you can accept.

b) Loan appetites – Is the bank mainly a consumer or commercial lender? What industries specialization does the bank promote? Make sure they already understand your business, because you don’t have time to teach them. What types of loans does the bank not want to make?

Banks’ may mainly make loans on income producing real estate or loans to owner occupied businesses. If you are looking for something else, it is probably not going to happen with the bank you are talking too. What size loan customers does the bank want? Banks normally consider a small business one which has revenues less than $2 million. They define lower middle market businesses as those with revenues from $2 million to $30 million. Finally, they consider middle market businesses as having revenues from $30 million to $250 million. Make sure your company fits into the size the bank wants, or you may not be satisfied with the bank’s effort to get and retain your business.

4) Loan Office Experience Level

“Do you want to deal with an order taker or a decision maker?”

5) Bank’s Desire

Do you feel they are interested and excited about doing business with you? Recall your dating days, how you got excited if the other person appeared interested! This is about establishing a relationship. Is there connection between you and the bank? You must remember there is a price to pay if you have to change your banking relationship.

Larry finished by telling Al, “What it really boils down to is two people getting to know one another and seeing if their needs match.”

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Factoring: What, When, and Where

See Also:
Another Way To Look At Factoring
Accounting for Factored Receivables
Journal Entries for Factored Receivables
Can Factoring Be Better Than a Bank Loan?
Factoring is Not for My Company
History of Factoring
How Factoring Can Make or Save Money
What is Factoring Receivables

What, Where, and When To Use Factoring

In order to make a well informed decision on using factoring services, a CFO must understand the factoring product, truly if you do not; your company should not be using it. But to understand the factoring product, examine it from several perspectives. When you know the what, where, and when to use factoring, you can answer some of those basic questions.

What is Factoring

Factoring is the purchase of qualified Accounts Receivable or invoices by a factoring company from an operating business in order to provide immediate Cash Flow to that business. Most factoring Purchase Lines allow for you to sell your invoices at 80 to 85% of face value up to a 45 day period from the invoice date. Typically, you can age the invoices up to 90 days from the purchase date before you must buy them back from the factoring company.

Some factoring companies collect your invoices for you and some do not. Some banks allow for you, the client, to collect your own invoices, and use their treasury management services as a mail box for the collection of the invoices. Pricing is typically based on the risk of the deal, size of the deal, and the volume of invoices sold each month. Finding the proper factoring company with the best pricing and the ability to create a strong banking relationship is as important as the characteristics of the deal. That is why the banks have been so successful with their product. They offer the best of both worlds: very competitive pricing and the ability to develop a long term banking relationship.

When To Use Factoring

Deciding when to factor may be the easiest decision to make in the factoring equation. Any transitional need in a company can create a factoring situation. High growth is usually the most common in the Texas market, however, lack of capital, high debt leverage, payroll tax problems, or just not being able to meet your payables within their terms are all reasons for using the factoring product. Always, the primary goal is to increase your cash flow and allow you to smooth out the up and down swings which are created by clients that do not care to pay their bills in a timely manner.

The time value of money becomes critical in these situations, and it seems to be the norm that the larger the client, the slower they pay. This is especially true in the staffing industry where payrolls must be met on a weekly or bi-weekly basis. But clients pay in a 45 to 60 day period subsequent to receiving their bill. Whatever the reason, cash flow is the key element in building and growing a strong business, and if this is your hope for the company you represent as a CFO, then factoring your receivables could be the answer.

Where You Should Factor

Deciding where to factor is probably the hardest decision to make once you conclude that factoring is what your company’s needs. There is a variety of independent and bank owned factoring companies to choose from, and they all have their own cash flow programs. Coined phrases for cash flow solutions are the norm, but keep in mind that there are many differences to their services. Commitment fees, exit fees, delinquency fees, and then standard “factoring fees” all contribute to your cost for the service. Many companies prefer bank owned and operated factoring programs because of the banking relationship it creates and generally lower rates due to the bank’s low cost of money. However, some prefer the service you get from the smaller, independent factoring companies. But keep in mind that you generally pay for that service.

Review Legal Document

Regardless of what type of factoring company you pick to purchase your invoices, always review with a keen eye the legal documents, they will tell the story on the cost of the service. Make sure you have a thorough understanding of the rights of the factoring company and the control they have over the cash flow of your company. Many times you can negotiate away the extra fees, but you must ask. These fees can include the exit fee and the delinquency fee.

Involve Legal Counsel

Also, you may want your legal counsel or your CPA to take a look at the agreement to better define the ramifications for issues that naturally occur in your business, but may not be in accordance with how the program works, like having 60 day payment terms to some of your customers. This small, insignificant issue could put you in default of the Purchase and Sale Agreement and result in higher factoring charges to your company. Clearly, having your council review these documents prior to their execution could save you thousands down the road.

Ask for References

Lastly, a real acid test for a factoring company is to ask for references, and find some clients that are no longer with the factoring company, as this could tell you volumes on how they treat their clients, and how well their services work on a day to day basis. Good factoring companies should have no problem allowing you to check them out. Since factoring is largely unregulated, you owe it to your company to do at least this much due diligence. Good luck and may your cash flow freely.

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

when to use factoring

when to use factoring

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