According to a recent report from the Federal Reserve, small business owners are still having trouble accessing credit despite a generally optimistic outlook for business in the years ahead. The report says that 44 percent of the respondents cited difficulty in accessing credit or securing funds for expansion.
Is this really a surprise? Not to me. Business owners see risk in a different way from bankers and may not understand what the bank wants and how best to present their case and negotiate financing. Owners see opportunity as they look to expand. Banks see risks that may affect loan repayment. Banks want to make loans, but, they want “good” loans. Loans repaid from cash flow not a secondary or tertiary repayment source such as sale of collateral or owner’s personal resources.
Apply for a business loan and you will provide a lot of information. The bank wants company financial statements (annual and interim), corporate tax returns, personal financial statements, personal tax returns, aging’s of receivables and payables, collateral asset information and more.
The owner assembles the information and sends it to the banker and waits. What could go wrong? Lots. Here is a partial list (not making these up!)
- The annual financial statements don’t agree to the tax returns.
- The financial statements do not have assets and liabilities properly classified.
- The statements do not follow from year one to the next.
- The interim statements are in a different form than the year-end statements.
- The aging of accounts receivable and/or accounts payable has lots of over 60 and 90-day balances and/or doesn’t agree to the financial statements.
- The owners credit report shows liens or judgments and a low score.
- The financial statements show marginal profits or losses and the projections are wildly optimistic.
Now you are explaining errors and this is not the first impression you want to make.
Aside from poorly documented financials, there are times when the owner may explain the loan need and the view of the future and this doesn’t match the forecast. A well thought out plan with good projections to match the ideas being presented will enhance the chances of success in getting financing and making your plans work.
Lets go back to the beginning thesis: companies need banks to finance cash timing differences and expansion opportunities. The Bank wants to supply credit to qualified businesses. The application process and the ongoing financial reporting process are important. You must be able to clearly articulate the borrowing need, show how much you want to borrow and support it with good financial information. This documentation is important because senior management approvers, loan reviewers and federal examiners may only see documentation in a loan file.
Bad information or no information could result on your company being put on the “watch list” (a bad list!). Now you are under further scrutiny and having to prove with even more information the viability of your business.
It doesn’t have to be this hard. Bankers understand good business practices and the challenges of earning profits and generating cash flow. But they need concise and accurate financial information that supports your explanations about the business history and the future prospects. Remember that banks want to make loans to good companies. Tell them about your business. Provide good financial information and keep them informed about good new and bad news.
Getting good financial information is the result of a process. You need a good accounting system properly set up and organized to record the activities of the company. A properly supervised accounting team is important for your company. Hire the financial person who can help you negotiate with banks and investors, prepare and update business plans and manage the preparation of financial reports.
Have more questions? Call me to discuss. I’d be happy to help you grow your business.