If your budget shows you’ll have financing needs next year, you better start talking to your lender now. Here’s what they’ll be looking for.
These days, planning with banks about credit can feel like slamming your head into a brick wall. Conversations that were previously red tape are being drawn out longer and longer as lenders have become more risk averse. But, fear not, there are a number of strategies you can employ to ensure such talks about your 2011 credit needs are minimally headache inducing.
Most banks do want to approve as many small businesses as they can. But, in order for that to happen, companies must come prepared to bank planning with complete accounting and budgeting information, verifiable data, and an open mind.
When you enter into credit planning with your banking partners you must always be as open as possible about the financial picture of your company. Business owners who talk regularly with their bankers are able to clearly explain the distinctive needs of their business and find the right financial solutions.
Also, come prepared with accurate, complete records. Good accounting practices and information that is provable will help your lender not only in general credit decision-making, but also in selecting the right credit solution for your company.
While this advice may not help companies that are just trying to find credit anywhere they can get it right now, it is something to think about going forward. By choosing relationship banks carefully, and selecting a bank that provides a single point of contact—a single relationship manager that can be treated as a consultant as well as a credit manager–it creates a stronger bond.
Plus, what banks are looking for on the most basic level is assurance that the credit line will be repaid. By building a relationship over a number of years, it provides a history that gives the relationship manager confidence in the company when times are tougher.
Banks want accurate cash forecasting, and for executives and owners to have a clear understanding of their incoming and outgoing flows–and consequent funding needs. Banks want to see that companies are taking proactive steps to have a clear picture of existing cash and make the most efficient use of internal cash flows. One inexpensive and effective way to demonstrate this is to use the increasing number of forecasting tools that banks provide their banking clients—often free of charge.
Businesses can also look to other sources to reduce external funding needs, such as requesting credit terms with suppliers. Factoring—or selling accounts receivable to a factor at a discount–is also an option, albeit a costly one. But it may be looked upon simply as an opportunity cost.
When it comes time to negotiate or renegotiate a line of credit with banking partners, every company will have a unique discussion based on its financial picture and credit needs.
However, it pays to be prepared and go into such conversations with a thorough understanding of the company’s funding needs, a clear picture of cash flows, good accounting records, and a sound cash flow forecast with verifiable data. Having good record keeping and being open with relationship managers will make the discussion easier, and will more likely result in a positive outcome.