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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.

Looking for more capital? There may be cash lying around your business. Learn the 25 Ways to Improve Cash Flow today.

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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What Your Banker Wants You To Know

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Broken Debt Covenants?

It’s almost that time again…  quarterly debt covenant reporting.  Is your company going to have some explaining to do?  If so, you’re not alone.

Banks generally set 3-4 key covenants on their loans.  These covenants serve as “tripwires” that alert the bank to potential trouble ahead.  Most companies don’t bust all of them, but many find themselves out of compliance with at least one of them at times.  This is particularly true in a soft economy like we’re seeing in Houston these days.

The most common broken debt covenant we see in this environment is the Debt Service Coverage Ratio (DSCR).  Mathematically, DSCR equals:

DSCR=EBIT/(Interest +(Principal/1-Tax Rate))

In English, DSCR is equal to Net Operating Income divided by the cost to service the company’s debt.  It basically measures your company’s ability to make its debt payments.  You can see why this covenant is especially important to your banker

Impact of Broken Debt Covenants

What does it mean to have broken debt covenants?  Worst case, the bank can call your loan.  Generally speaking, banks don’t want to do this, especially if it’s not part of a troubling pattern for your company.  The more likely scenario is that your credit line could be frozen and your company will need to start surviving off only the cash flow generated from operations.

If you find yourself in the situation described above, don’t panic.  By making a few changes, your company can free up cash flow to get a little breathing room until things turn around.  Here are a few examples:

Ask key vendors to stretch their terms – Your vendors don’t want to own your company.  When cash is tight, most vendors will work with you if you as long as you are willing to make regular payments, even if it’s not by the due date.

Have a designated collections person – Nobody likes making collection calls, so unless collections is someone’s job, it’s no one’s job.  Having a dedicated collections person ensures that customers are paying within terms or have made arrangements to pay out past-due invoices, ensuring that your business has the cash to fund operations.

Invoice immediately – It may not seem like much, but getting your invoices out even a couple of days sooner can free up a considerable amount of cash.  Make sure you get them out right away and that they are clear and easy-to-read to avoid payment delays.

Looking for more ideas to help free up cash?  Click the link below to download our free list 25 Ways to Improve Cash Flow.

broken debt covenants

broken debt covenants

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