Your Small Business and “Bankability”


A recent article by Paul Davidson of USA Today stated, “Lenders are tightening the credit spigots for businesses, raising concerns about an economy that’s already facing global headwinds and a rising risk of recession.”  Some small business owners, already facing challenges for growth and profitability will see the bad news that announcement will bring.  Doing what you can to improve your “bankability” will not only help your business but will also help you secure a business loan should you need it.

As a general rule, banks lend on cash flow and the 5 C’s.  The 5 C’s are:

Character  –  When lenders evaluate character, they look at stability. If you want a loan for your business, the lender may consider your experience and track record in your business and industry to evaluate how trustworthy you are to repay.

Capacity  –  Capacity refers to considering your other debts and expenses when determining your ability to repay the loan. Creditors evaluate your debt-to-income ratio, that is, how much you owe compared to how much you earn.

Capital  –  Capital refers to your net worth — the value of your assets minus your liabilities.

Collateral  –  Collateral refers to any asset of a borrower that a lender has a right to take ownership of and use to pay the debt if the borrower is unable to make the loan payments as agreed.

Conditions  –  Lenders consider a number of outside circumstances that may affect the borrower’s financial situation and ability to repay. If the borrower is a business, the lender may evaluate the financial health of the borrower’s industry, their local market, and competition.

These are not the only considerations the bank will use but they are the most common.  Other items considered are your credit score and your tax return history.

Understanding what you the business owner can do to improve these factors and then executing a plan to improve them is critical to becoming bankable.  While not a guarantee of a loan the improvement will, at a minimum, improve the health and sustainability of your business.  Improving your cash flow takes a few simple steps:

Enforce the terms of payment for your business.  Ideally, this means getting paid as quickly as possible.  Accounts receivable, the money you are owned, has its greatest value to your business if you are paid within 30-days of invoice.  The longer you hold the receivable the lower the value it has for your business.

Stretch out your own payables.  While this seems in conflict with enforcing your terms of payment it helps preserve your business cash.  Paying your payables as scheduled without accelerating them is a good first step.

Take advantage of discounts offered for early no penalty payments.  If your suppliers don’t offer this kind of incentive, ask for it; they may be willing to offer the discount in return for speeding up their receivables.

Evaluate your pricing.  Is your pricing reflective of your full value stream, which includes your profit?  Does it cover all costs of producing or providing?  Is it market competitive?  Balancing those helps with your cash management.

Manage your inventory.   Just because you can buy in bulk at a discount doesn’t necessarily make it a good purchase.  Inventory ties up a lot of cash and some inventory becomes damaged or spoils while you hold it.  Managing your inventory more tightly helps ensure your cash availability.

Having a strong measured understanding of the total performance of your business is critical to obtaining and maintaining your bankability.  Accepting that no one part of your business can operate independently of any of the others is a good start.  An example of this is to reject the notion that “to make more you must sell more.”  While this may certainly improve your sales it may also increase other costs to the business and reduce your profit.

You started your business to provide you with an income that will allow you to achieve what is important to you.  Understanding your total business takes effort and the process can be learned if you use the right resources.  Someone skilled and experienced with small business is a great resource.  You want to learn every aspect of your business and yes, that includes what many small business owners tend to shy away from, the financial management of a business.  Learning that doesn’t have to be hard and again, with the right resource, you can do this simply and without a degree in accounting.

Bankability is a critical step for a business even if you are presently fortunate enough to not need a business loan.  Things do happen and you never know when obtaining a loan from your Bank or Credit Union will be necessary.  Being ready when the time comes is a crucial and business saving effort.