Look Good to your Bank!

In tough times you borrow money to get through. In good times you borrow to expand your business.  Even if you don’t need any money today, read on. Either way, here’s how to look good to your bank.

The first and foremost rule about borrowing money is — You must be able to pay it back.  Before lending you any money, the bank wants to see that the money is there to pay them back. There must be some left over after you pay the bills you already owe.

Start with your current bank, even if you bank through the drive-up window your bank will look at your deposit history, your overdrafts, average daily balance and this may be just the time to develop a stronger relationship.

Find out what paperwork you need.  With good credit, an established business, and less than $100K to borrow; your bank may have a low document loan.

Your taxes are the first documents the bank will want to see.  Some banks I talked to want three years of business and personal tax returns.

Your P & L, (Profit and Loss) statements are the next documents to prepare.  You need at least two year’s worth. If it’s late in the year,  you’ll also need the most recent quarterly statements.  If you are not preparing and reading your P&L already, you are running your business without a dashboard! Your P&L tells you where your business is going.  If you want to know how to read your P&L, call me.

The bank primarily looks at is your debt service ratio, the amount of your profits going to paying back the debt each month.  The lower the ratio, the fewer dollars of your available cash go to pay that loan making the bank believe your ability to pay. You need enough to pay the bank and still pay yourself enough to live.  Otherwise, you’ll feel like you’re working for the bank.

You need a sound business plan to get funding for a new venture. Even if you’ve been in business several years, you’ll need to show where the customers will come from, why they will buy your product/service and what it will cost to operate the new business venture. If your business plan is detailed enough to be convincing, you’re more likely to succeed; with the venture and with the bank.

If you have bad credit, life is hard. You must have better, more complete documentation, more cash coming, and lower debt service ratio in order to make the bank believe you’ll pay them back; on time, every month. You must show that your business is profitable and likely to stay that way.

Get a line of credit even when you don’t need money now. A line of credit is a promise by the bank that you can borrow up to the credit limit anytime. The absolute best time to ask for money is when you don’t need it. If you already have enough money, the bank will love you.  Once you get the line of credit established, it will be good for several years and not cost much to maintain. Down the road, things might not be so rosy and you’ll need it and wish you had it.

In my work helping businesses prosper, I find ways to improve cash flow, plan for future expansion and build business planning. If you would like me to introduce you to bankers likely to favor you, or you want help improving the business before approaching them, just call me.

As a former SCORE Counselor, small business profitability consultant, Certified Financial Planner and active member of the Reading Berks Chamber’s small business programs, Merra Lee Moffitt keeps her eye on the pulse of Eastern PA Business. Having created and built her own 30-person company, she KNOWS how to solve small business problems.  A recognized expert on service business issues, Merra Lee can be reached at 888-920-2030 or MerraLee@CapturepProfits.com.  © Copyright 2003 Merra Lee Moffitt.