Last week I met with a business owner who had just learned that his bank was not renewing his line of credit. Over the last 15 years the business had grown consistently, always had a $750,000 line of credit, but this year revenue was way off due to the recession. The bank had changed ownership; his banker of 10 years had lost his job and after 45 years in business, the business owner was in brand new territory; finding a new LOC in a depressed economy during a credit crunch.
There are hundreds of businesses in central Indiana in this predicament, so I decided to do a little research and come up with some guidelines of what it takes to get the attention of a lender in this “NEW” economy.
- Credit score of the owner of 720 or better.
- Decent payment history with vendors
- Debt service coverage ratio of 1.25:1.
- Debt to worth ratio 2:1 or lower
- A history of profitability
- At least 2 years in business
- Accurate financial statements
PROFITABILITY is the primary ingredient that impacts 5 of the 7 requirements listed above. In any economy, it is critical for management to keep focused on profitability. It is critical that the company work to a profit plan. It impacts if the owner gets compensated adequately and regularly; it determines if vendors get paid in a timely manner; it is one of the largest components in cash flow; it grows equity (which impacts the debt to worth ratio); and the longer the history of profitability, the more likely the company is stronger financially and as an added bonus – worth more.
And lastly, a word about accurate financial statements – although this seems like a no-brainer; it is a problem with many companies. Financial statements are the report cards that everyone outside your organization evaluates to see your performance as a manager. If the information is inaccurate, it reflects negatively on your ability to run your company. Accurate statements prepared on the “accrual” basis are the first step in managing a company well and getting your bankers trust.
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