5 Insider’s Tips on Obtaining Financing from the Bank
As an audit firm, we are always advising our clients on when they should seek financing and how best to approach lenders. The reasons a business should seek financing will vary, and include supporting growth or expansion, ensuring sufficient working capital, mitigating cash flow fluctuations, dealing with emergency expenses, purchasing or replacing equipment, and hiring additional staff, to name a few.
But what do the banks look for when deciding whether or not to provide your business with financing? The following is a list of some of the most important factors the bank considers when assessing your business’ eligibility for financing, along with some tips on how you can increase the likelihood that your business will qualify for the financing you need.
1. Financial Performance
Financial performance represents the overall profitability of your business. Not only does it demonstrate your business’ ability to generate cash flow, it is also an indication of its ability to repay any financing loans.
The reliability of your financial information is extremely important. Banks will require financial statements, and when they are prepared by an impartial, reputable accounting and audit firm, you look more prepared and organized. This will make a great first impression and will bring you one step closer to approval. Further, depending on the level of financing you are requesting, providing audited statements demonstrates your commitment to the accuracy of the financial information.
2. Health of Past and Current Debts
Your company’s financial health and ability to repay current and future debt is typically reviewed through the calculation of these three ratios:
- Debt-to-Equity Ratio – The amount of current debt, divided by the equity value (the value of assets, minus the cost of liabilities). This is used to assess dependence on debt, with a lower debt-to-equity ratio being ideal.
- Current Ratio – The amount of your current assets, divided by your current liabilities. This is used to assess a company’s ability to repay debts. A high current ratio is positive and indicates your ability to repay a lender.
- Debt Service Coverage Ratio – Your annual net operating income, divided by your total debt service over the period. This is an assessment of how prepared your business is to handle its current debt load.
In addition to these ratios, the bank will take into consideration your track record for repayment of previous debts, and your company’s and your overall credit rating.
By borrowing responsibly the amount of debt that you can afford, and repaying your debts within the terms of the agreement, you will demonstrate that you can handle credit and debt, which can greatly improve your standing with the banks.
3. Management, Leadership, & Planning
Any potential lender will be interested in not only the performance of a company, but the quality of its leadership. The experience and track records of the owners, managers, and other business leadership are representative of a business’ stability and the reliability of its future performance.
Before approaching a bank for financing, you may wish to perform an internal audit of your business to identify any weaknesses or redundancies in leadership and management so that any issues are addressed before the bank conducts their assessments.
Having business assets that can be offered as collateral, such as equipment, real estate, inventory, and accounts receivable, can greatly improve the likelihood of getting approved for financing. Even if you have already borrowed against a property (such as a mortgage on real estate), you may still be able to leverage that item as security. Further, when seeking financing to assist with the purchase of assets, those assets are generally used as security.
If your business does not have sufficient assets that can be used as collateral, be prepared to offer personal guarantees or pledges on assets held personally. Being open and transparent with your lender about your financing needs will ensure you maximize the options available. And, be sure to seek the advice of your accounting and audit advisor, who will help you negotiate the best terms for your financing agreement.
5. Line of Credit
It is advisable to secure a line of credit before you actually need it. Not only can a line of credit be a useful tool for financing the day-to-day operations of your business, it also provides a much-needed cash reserve if your business operations are cyclical in nature or if your business experiences a temporary down-turn.
Considering Financing? Call Fuller Landau First.
If you’re considering financing, be sure to do your homework first! Our team of advisors at Fuller Landau can prepare reviewed or audited financial statements that the bank will require, and offer valuable insight on how to maximize your ability to obtain financing.
To get started, contact us for an initial consultation today.