Why your bank can play a key role in boosting the value of your business

When you get your bank involved in your company’s growth strategy, you create opportunities to increase the value of your business.
“A good bank has personnel who want to play an integral role in helping your company grow,” says JC Timmons, senior vice president and team leader of Corporate Banking at Bridge Bank. “They take the time to learn about your company’s history and roots, understand where your company is headed and plan what needs to be done to achieve your goals. What often gets lost is that banks can do more than just process transactions and lend you money.”
Smart Business spoke with Timmons about what banks can do to increase the value of your business and the role debt and equity play in making that happen.
What is the first step in engaging your bank to boost your company’s value?
A professional team of business bankers needs to be engaged. Your business needs to share short-term and intermediate business objectives with this team, as this is the only way a bank can truly get to know your company.
By working in partnership toward those objectives, your business has a trusted adviser for two-way consultation between the bank and your company. In truly understanding your business, your bank can look for opportunities as well as warning signs in challenging environments.
How does this relationship increase value?
If your bank has its finger on the pulse of what’s happening with your business, it increases the level of trust and understanding between your business and the bank.
In turn, that helps improve your value and creditworthiness by increasing the amount and certainty of your company’s free cash flow, which is generally the cash remaining after obligations, dividends and capital expenditures are met.
The value would come through improving sales, margins, accounts receivable and other measurables.
When you have certainty in your cash flow, it shifts the focus from meeting financing needs to improving your products or services. Understandably, most business owners and managers are so busy dealing with daily operations that they don’t focus on these reliable methods for building value.
These banking relationships can help you make more strategic decisions about your company’s future, including determining the proper amount of debt for anticipated cash demands in the future. There are business considerations for debt financing at each stage of a company’s life cycle.
A responsible lender will also explain those considerations and the impact on the financial statement and ultimately the influence on the value of the company.
What are the pros and cons of raising debt vs. equity?
There are key differences between capital alternatives and they can be far-reaching, depending on each particular company’s circumstance.
A key advantage of bank debt vs. equity is the founder’s ownership is not diluted to outside investors. Additionally, closing time on bank debt is shorter than the time frame for raising equity.
Oftentimes, debt can be obtained using the same strategic plan as equity and you can pursue the debt and the equity path simultaneously with minor adjustments to that strategic plan for outside analysts to review.
It’s going to be different for each company depending on the stage of your business.
Is the debt going to be used for an acquisition? Is it going to be for ongoing working capital needs?
It’s a balancing act of not putting too much debt into a situation where it’s going to overburden your company. But you also want to give proper amounts of debt to support growth and support forecasted cash flow. The best way to do this is through understanding the company, understanding the objectives and through constant feedback between the parties involved.
What if you’re not looking to sell?
That free cash flow number is generally indisputable. Whether or not a company has an intended multiple they are trying to achieve in the next 18 to 24 months or whether the goal is to sell the company or not, focusing on that free cash flow number and the dependability of it is an effective strategy.  ●
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