Most businesses I deal with either desire or have a Bank Loan. Let me start with the desire part first. You must be clear why you desire a Bank Loan. If it is because you are getting regularly being paid late by your customers, expenses are increasing and you have Payables to meet now, be cautious. Borrowing does not solve poor financial management, it only postpones the inevitable. It is better to understand why exactly this is happening and cure the issues rather than borrow. Borrowing money should be for “healthy reasons” – expansion, growth into a new area or a genuine urgent temporary need, after which funds should be earmarked for repayment.
How do you get and keep a Bank loan? You get it by showing your past and forecasting your future performance. Your past performance is evidenced by your tax returns, annual financials and up to date monthly financials – banks want to be up to date as possible. Then they look for the owners personal financials. This part is relatively easy – even if businesses are not current in their accounting work , this can be done in a reasonably quick period of time. The challenge and the savvy is in doing the forecasting. Here is where Banks will know if they are dealing with a knowledgeable owner and management. Most businesses do not take the time to do meaning ful and complete forecasts. This is not simply an Income statement cobbled together based on a linear increase based on past performance, but this is your opportunity to demonstrate the assumptions and discipline with which you run the business. Start with how you will obtain Sales and how much this will bring in, how you will deliver and the associated costs. How quickly ( or late) you will collect the money and where you need to invest – people, facilities, Inventory and Assets that will be needed. The forecast must be a complete set of Financials – Income, Balance Sheet and cash flow. Make your assumptions the same as what you can live by.
Keeping a Bank loan – start at the “terms of agreement” stage. Review the Bank offer letter and run it through your projections for the next 12 months. Will you meet the loan covenants that are usually set? See how the performance conditions of the loan, impact your assumptions and thereby your business. If this is agreeable and you obtain the loan, then you will probably have to send monthly or quarterly financials and be prepared to answer questions. Can you? Forging an open and honest relationship starts here. The only surprises the Banks like are the positive ones! Keep them informed way ahead of any headwinds and turbulence that you may expect.