Financing is critical to the growth, development and survival of small businesses in Indiana. What is currently happening in the financial markets today is not helpful to Indiana small businesses overall. Every business owner today knows that maintaining their current lending relationships is critical. This brings me to discuss the important topic of avoiding problems with your bank.
Here are Dynasty’s top five “RED FLAGS” that bankers look for that can lead to closer scrutiny of your business and possibly even a loss of the businesses borrowing ability.
1) Lack of timely financial information. One reason to not provide your financial information in a timely fashion may be that you or your CPA are busy. However, bankers will naturally assume that there is poor financial performance being kept from them. I recommend voluntarily providing the information before being asked, even if it is going to prompt concerns. My experience shows that being proactive with the bank leads to better outcomes in the long run.
2) Lavish spending. Whether it is on personal or business assets, owning the most expensive furniture, cars or other assets at the expense of a company’s liquidity can quickly turn a bank against a business. I have seen more relationships strained or more prospect opportunities end when it is discovered the business or business owner is highly leveraged in unnecessary spending.
3) Increasing receivables and payables. A slowdown in collecting receivables will lead to a cash flow crisis resulting in the inability to cover payables and other debts. You can be a best in class business, offering the best products and the highest level of customer service, yet close the doors because there is no cash. This problem can easily be spotted in the financial statements.
4) Declining deposit balances. Some companies will have normal cycles that result in higher or lower balances during those periods. Bankers who know their clients will spot an unusual increase or decrease in cash and ask questions. Overdrafts on your account immediately send an undesired signal.
5) Other new bank debt. Bankers do not like surprises. Finding out a company has new borrowings from another bank is a major concern. Banks occasionally check to see if any liens have been field on a company’s assets. If a banker sees new debt they will wonder why you did not call them first and have real questions about the relationship.
One of the best methods of insuring you don’t have any RED FLAGS is to maintain a continued dialogue with your banker. A banker’s job is to spend time talking to clients and understanding their business beyond the need of the moment. At the same time, business owners should take steps to ensure a solid relationship exists with their bank and be proactive as well.
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