A 12 insight START and STOP roadmap bank assessment for small businesses.
Bank revenue is derived from lines of credit, term loans, merchant service accounts and deposits.
Another source of bank revenue is wealth management services which banks make available to the owners of small businesses as well as their other customers. Consequently banks want your business. They are seeking long term relationships with small businesses that are in a growth mode. Fortunately bank loans have the lowest interest rates and the most flexible loan terms available. You probably want access to these low rate loans. You just need a few tips to handle the loan process efficiently and effectively.
The following information with START and STOP signals provides a roadmap for businesses with two or more years of financial reporting that report growth in both revenue and earnings. These successful business usually need capital for business expansion.
Here are the 12 Start and Stop bank signals:
1. STOP signs
STOP relying solely on third party financial services.
You may need a CPA to file your tax returns, but management should supervise and comprehend all aspects of the corporate balance sheet, the profit and loss statements and the tax returns. This familiarity with the financial statements will assure lenders that the principals of the company comprehend financial matters and can make wise financial decisions.
Furthermore, if management has to wait days or weeks to receive timely reports from outside financial services, the cost of the delays can be measured in loss of revenue during the waiting period.
2. STOP signs
STOP waiting until year end to update and review your financial records. Review your profit and loss statements monthly and have quarterly reports prepared immediately at the end of each quarter. Prepare comparable historical reports that reflect growth patterns. Filing tax returns in January rather than waiting until April 15th will put you in the front of the line and decrease the time requirements for loan processing. You can get a head start by starting the loan process with the internal financial information and providing tax returns that support the financial information prior to loan closing.
3. START signs
START preparing the required back up documents that will be needed prior to loan closing. Delays in the underwriting process are commonly due to the inability of the borrower to provide supportive information that does not have to be prepared – merely provided. If the historical financial information is acceptable to the lender, the balance of the required documents that needed to comply with bank regulations normally will not impact a loan closing. All you have to do is deliver them.
4. STOP signs
STOP making tax avoidance your priority. The year-end profit and loss statement should reflect a profit that will support the loan request. Most lenders look for a minimum of 1.2 debt service coverage. If the company has adequate profitability to make distributions to the shareholders, that should be done in the first quarter of the year rather than at year end.
5. STOP signs
STOP using personal credit cards to pay business expenses. The use of personal credit cards may negatively impact your credit score if the credit used exceeds 35% of the available credit line. And, lenders are not inclined to repay personal debt as a line item in a use of proceeds schedule.
6. STOP signs
STOP signing any major contracts or debt obligations for business expansion until you arrange financing that will cover all intended expenses. Debt on which UCC filings have been placed will make the loan process more difficult.
7. START signs
START using a business credit card for business operating expenses. Banks are interested in providing merchant services for businesses. You can shop for pricing and terms of these services while you are shopping for a loan. If you are a heavy user of credit cards and other merchant services the bank will have an immediate interest in your business.
8. START signs
START reviewing the personal credit scores of all stakeholder holding an interest of 20% or greater in the business. Each stakeholder should pull his own FICO score to avoid hard pulls by the lender being the first step in the loan process. The lender will usually accept your own FICO score and delay the request for a full report until later in the loan process when all parties are closer to agreeing on loan terms and conditions.
9. START signs
START preparing personal financial statements (PFS) for all 20% plus stakeholders. Most banks will accept the standard SBA personal financial form that is available on the SBA web site. They always examine owners PFS to see how much you own and how much you owe.
10. START signs
START reviewing the accounts receivable schedules and any current outstanding debt owed either personally or by the business. Prepare schedules that include loan balances and monthly payments.
11. START signs
START thinking about cash flow projections for the next two years. It is best to prepare a schedule of assumptions first and then spread the assumptions on an excel spread sheet. There are good spread sheet formats available on line for this task.
12. START signs
START preparing A Source and Use of Funds Schedule. Separate the schedule into two categories; working capital and long term purchases such as equipment, and property improvements.
Takeaway
If you are interested in obtaining lines of credit, conventional term loans, SBA guaranteed loans, and special purpose loans such as equipment financing, banks are the best option for most operating businesses with two years of financial reporting history. At first glance this may appear to be a tedious process, but bank debt allows you to remain the captain of your ship. The first time may be the worst time, but the long term benefits are worth the effort. That first journey may have hurdles, but it worth the trouble.
With debt you always have the option of changing your course and seeking a better route. Once your growth path accelerates everyone wants to take the ride with you.
Good luck!
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