Banking and Finance

Smart financing

Print This Page

Send this page to a friend

Shannan Pratt
Commercial relationship manager
Capital One Bank, Dallas

---

There comes a time when a business grows fast enough that it needs to ask a bank for additional financing, whether it be a revolving line of credit or an amortizing term loan. But no matter how well a business is doing, it can’t just assume the bank will automatically grant it what it needs.

“Forecasting cash flow is one way to prepare for a meeting with your banker,” says Shannan Pratt, commercial relationship manager with Capital One Bank^SM in Dallas. “Having detailed financial statements is another way to make a good first impression.”

Smart Business spoke with Pratt about what kinds of financing are available, how a business should go about selecting a bank to deal with and then what it can do to prepare for the loan meeting.

How does a company determine if it needs financing?

A company’s financing needs are determined by the timing of payments in delivering the product to the customer, along with its growth rate and margins. For example, if your customer pays you the full cost of product at the time of the order, then you most likely won’t need financing unless your margins aren’t enough to cover your costs. If you’re like most companies, you must pay for the order to be produced and cover your overhead expenses while you’re producing the product. Once the product is delivered, you must wait until the payment is received. This order to final payment time is the gap that financing is designed to fill. This is especially true if you’re growing, since you’re booking more orders each month that require working capital to produce while still waiting for the prior month’s deliveries to be paid.

The best way to determine the amount of financing needed is to create a cash flow forecast that details the payments needed in order to provide an expected level of output. Overlay the expected payments from customers to determine the net amount of cash your business will be receiving or paying on a weekly or monthly basis. The negative cash flow periods will give you an idea of the amount of financing needed to support your business.

What can a company do to prepare for a meeting with a banker to secure financing?

Your financial statements, current and historical, are the primary tools that a bank will use in its evaluation. The larger your business, the more detailed third-party oversight of your financial statements will be required by the bank. An example of this is in the case of small, sole-proprietor businesses, where federal tax returns are the main financial statement verification tool. A larger business that files a corporate or partnership tax return may additionally be required to have its statements compiled or verified by a certified public accountant. Finally, the most detailed review of financial statements, and the most favored by banks, is an audit. This allows the bank to rely on the financial statements as the size of the loan, complexity of the business and the risk to the lender increases.

It is best to have the most comprehensive review by a CPA you can afford. This will not only give the bank more confidence in your company’s financial reporting, it will also help future equity investors have the same confidence in your company.

What types of lines of credit or large-scale financing products are available?

One of the best things about commercial banking is the ability to customize the loan products to a company’s needs. The most common working capital loan is a revolving line of credit, which is an amount of money the company can borrow and pay back as needed to satisfy its cash flow needs. Based upon the assets of the company, these lines can either be a not-to-exceed borrowing amount or a variable amount based upon accounts receivable and/or inventory. Assets purchased can be financed through amortizing term loans or interest-only loans or structured as leases.

What should a company look for in a banker?

Your banking relationship manager is an advisor to your company, just like your accountant and attorney. But unlike your accountant and attorney, your banker is the liaison between your company and the bank it represents. Your banker must understand your business and industry well enough to anticipate your needs and be prepared to respond to your requests. Your banker should have a clear knowledge of his or her own institution and what he or she can provide to a business like yours. Banks have turnover just like any other business, so it’s important that you have multiple contacts there for continuity in case your banker leaves.

SHANNAN PRATT is a commercial relationship manager with CapitalOne Bank in Dallas. Reach him at (972) 855-3905 or shannan.pratt@capitalonebank.com.