Unless you’re running a tech company or an Amazon warehouse, the past couple years are likely to have put some stress on your cash flow and your balance sheet. If you were foresighted enough to arrange a fixed rate loan a couple years ago, you are probably just fine. If not, offsetting today’s increased costs of doing business with your customers’ willingness to absorb higher prices may make getting fresh financing a necessity, as it is for a couple of our clients.
So if you’re shopping or considering going shopping, and the interest rates aren’t sufficiently off putting, here are our thoughts on the things you will have to keep in mind, and deal with, as you approach lenders – even your current bank.
- Big bank vs. not-so-big bank: It’s easy to be swayed by the perceived prestige of saying you bank with one of those huge institutions whose name is on TV daily, with branches in every neighborhood, including yours. But unless your company delivers profitable revenues upwards of $100 million a year, you are frankly small potatoes to the majors, and unlikely to get any special consideration from the loan committee. We suggest you choose a bank more in line with your size – all the way from a local community bank to a mid-sized regional bank in your city. You will mean more to them and in return they will work harder to keep you satisfied. A win-win opportunity.
- Your perceived credibility as a lender who will pay the loan back without fail – this is about your numbers as well as your mission:
- Financial performance for the lasts 2-3 years that will demonstrate you know how to manage in challenging times by how well you did in the recent past. Revenue steady or rising gets high marks. Profitability holding up is the gold standard. If your recent track record isn’t so good, at least you should be able to show that it’s coming back from the coronavirus days and is now back in good stead with reasonably stable cash flow, never mind the existing debt load you’re managing. Growth of both top line and bottom line is great.
- Going forward, what can your lender expect? Is the trend demonstrated by your past couple years being projected forward in this year’s performance? Do your forecasts for the next year or two continue that trend? And does your planning – strategic plans and budgets – demonstrate how you will sustain that trend? Remember, that’s the timeframe your lender is interested in learning about, because that’s when they’ll be expecting timely repayment, conformity with covenants, and all that bank stuff.
- What type of financing do you really need?
- A term loan to get you through the next couple years or to capture a great opportunity,
- A credit line for some immediate relief, to use/repay/use as needed,
- New equipment financing to get your factory technologically current, or
- A long-term SBA loan to infuse semi-permanent capital into the company?
If your current bank doesn’t fit the model your company needs – typically demonstrated after you’ve had your first financing discussion with your bank rep – it’s likely time to go shopping for a new loan AND a new bank. One of our clients is making that move as I write this. They will succeed because we’ve helped them get ready after considering all the issues raised above.
How about you? If you’re not sure, but you know you need to do something, guess what?
We are Your CFO for Rent.