If you’re seeking a business loan, chances are you’re going to have some covenants written into the loan agreement.

“Covenants are basically additional terms in a loan agreement, usually to set financial guidelines for a company,” says Mike Dalton, vice president of commercial lending at National Bank and Trust. “I would expect that more than 99 percent of all loan agreements have covenants of some sort. You can pretty much count on a loan having covenants about collecting financial information.”

Smart Business spoke to Dalton about loan agreements and what business owners need to know about covenants.

What are some typical covenants?

Probably the most common are financial statements — requiring that the borrower provide annual tax returns, monthly operating statements in the form of balance sheets and income statements. A covenant that the borrower provides the lender with up-to-date financial information is very commonplace and put on virtually every loan.

Beyond that, a cash flow covenant of some sort is common. This can be measured in a number of different ways, but the covenant basically says that the company needs to maintain, whatever its debt service is, a certain percentage of that debt service over and above through profits and/or after distributions. Outside of the financials, common covenants involve current ratios and leverage ratios, whether debt to asset or debt to equity.

Are covenants solely to protect a bank’s interests, or do they provide any benefits for borrowers, as well?

It’s really mutually beneficial. From a bank’s standpoint, it is risk management, and loaning money is managing the risk of getting that money back. But covenants are certainly guidelines that are going to make a company healthier and are going to help a company potentially weather a down economy or a bad contract it took a loss on. If covenants make sure the business is maintaining appropriate liquidity ratios, they will help the company get through a bad situation. While the bank sets them, covenants are certainly a benefit to the borrower, as well. These are elements that can keep a company healthy and viable through a potential downturn.

Do business owners usually negotiate covenants, or do they use consultants?

It’s probably 50/50, depending on the size of the business. With a smaller, mom-and-pop operation, it’s likely going to be strictly a conversation between the bank and the business owners. When you get into larger companies, it’s not uncommon to have a CPA involved. Potential borrowers are always encouraged to consult with their CPAs.

Are banks dictating terms, or is there a give and take?

I would say they’re somewhat negotiated items. Ninety-plus percent of the time, it’s just a normal conversation sitting across the desk from a business owner and discussing a loan request, identifying strengths and weaknesses, and coming to a mutual agreement on rates, terms, etc., that are acceptable to both parties.

What happens if a covenant is not met?

There is some kind of penalty. It could be a one-time fee or a higher interest rate until that covenant is corrected.

Typically, it’s an interest rate bump — if a business has missed the covenant, the interest rate goes up by 1 percent, 2 percent or 3 percent until the business gets back into compliance with the covenant. If the borrower drops below its current ratio covenant, you’ve got a company that doesn’t have the appropriate amount of liquidity, so the bank’s risk goes up. Therefore, the rates are raised an appropriate amount. Loan rates, especially in commercial lending, are priced based on risk — the lower the risk, the lower the rate. Another way it’s done is a one-time fee where the bank says, ‘We’re going to measure this covenant at year-end, and if you miss it, we’re going to assess a penalty of a certain amount of dollars.’

If the interest rate can go up, is there anything a borrower can do that would lower its rate?

Anything that lessens the bank’s risk is going to lessen the rate. The borrower could provide additional collateral. If it has an acceptable current ratio now, could it ask, ‘If I increase my current ratio above this, can I get a lower rate?’ Sure.

Other than covenants, is there anything else business owners need to understand about loan agreements?

A loan note itself, other than the covenant section, is 90 percent boilerplate. The bank fills in a few blanks as far as loan amount, interest rate and payment amount, but the overwhelming percentage of a loan agreement is boilerplate legalities. They’re pretty standard; most banks use one particular software system. It’s a two-page note and the second page of the note is identical on every loan and goes over definitions of how the bank calculates interest, what makes a default and what remedies the bank has to collect on the loan in the event of a default. That’s the boilerplate section.

Mike Dalton is vice president of commercial lending at National Bank and Trust. Reach him at (937) 382-1441 or mdalton@nbtdirect.com.

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As a business partner, a lender should understand your business and its needs, says Mike Dalton, vice president of commercial lending at National Bank and Trust. But often business owners don’t consider other banks until they have a problem.

“In a lot of cases it just gets to be old habits. ‘This is what I’ve done since when I started my company. I see no reason to change.’ But quite often there is a reason to at least look at another bank,” Dalton says.

Smart Business spoke with Dalton about how to evaluate your banking relationship to determine if you should switch banks.

What should you consider when choosing a bank, and how often should you re-evaluate where you bank?

There are three categories you need to look at:

  • The relationship you have with your contact person.

  • Do the products and services the bank offers fit your company’s needs?

  • The stability of the bank, both from a financial standpoint and its direction.

At least every few years you should look at some options. If you have specific concerns with your bank, then that’s always a reason to re-evaluate.

What questions should you ask when reviewing a bank?

The important thing is to go back to those three things previously mentioned. You want to look at the relationship you have with the individual you’re going to be dealing with because your lender is truly your business partner. You need to have a good communication stream. Look at his or her background and experience. Does he or she have experience in your industry?

How do you determine what you need from a bank?

That falls back to the relationship; a good lender is going to ask you about your business. If you have a lender that’s just an order taker, that wants to ask you if you want fries with that Big Mac, then you’re probably with the wrong person. You need somebody that’s going to ask you about what products and services you use, what kind of pain do you have in your business. If there are needs that aren’t being met, a good lender can come up with solutions — a product or service that would make something easier for you and your company.

For example, a prospect comes in, wants a loan and provides financials. He or she may be overextended or can’t get what he or she is looking for, so the prospect and the banker need to have a conversation. The banker should tell the prospect, ‘We can’t meet that request right now but here’s a path to get there.’ Commercial lenders especially need to be an adviser for your company, by saying ‘Here’s another way of doing it.’ Or, the lender could help with a plan to get your balance sheet or your income statement in the condition it needs to be in.

The first thing a commercial lender should do with a new customer is sit down with the business owner. Financials aren’t always discussed in the first conversation. It’s more about developing the rapport and getting to know each other. For the banker, it’s about learning the business that you’re in and what you’re looking for in a bank.

What should you look at when evaluating a bank?

A majority of banks are publicly traded companies. Look at their annual reports, the balance sheets, etc. If they’re not a public company, go into the bank and ask to see their reports. The best way is to consult your CPA or attorney and ask for a referral. Your CPA is always a good referral source in that aspect and a good first step.

How do you know a bank will stick by you in tough times?

That’s an impossible question to answer, unless you know someone who has been a client at that bank and gone through a hard time of their own. No banker is going to tell you that if it’s tough times they’re going to ask you to leave the bank, but there are certainly some banks with that history. Ask your individual lender if they have other clients that are experiencing difficult times; how did they interact with them and what was the result of that transaction? Any commercial bank will have had a couple of different clients that have been through some very tough times in this down economy; so, did they work with them or find a way to get rid of them?

How important is it to have loan decisions made locally?

It makes a big difference, as opposed to an underwriter halfway across the country strictly looking at the numbers. When you deal with a local bank, local people who know your market and conditions make decisions. If there are questions they can come out to your facility and sit down with you, rather than you having to go to them.

Should you start a banking relationship before you have a pressing need?

When someone comes to a bank with pressing needs for equipment or an expansion, it could be a red flag. It may seem as if the company wasn’t planning ahead for this need. Or, maybe the bank it was with didn’t want to finance the project. If you think you might have a need coming up that your bank can’t meet, start looking. Think about how often you talk to your banker. If you’re not having regular conversations and they’re not meaningful conversations, then you probably have an issue. As banks, we like to do business with people that we know, so developing a relationship is important.

Mike Dalton is vice president of commercial lending at National Bank and Trust. Reach him at (937) 382-1441 or mdalton@nbtdirect.com.

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Cash is still king. In 2008 and 2009, many companies failed because of a lack of liquidity, and as the economy declined and sales trended south, many saw their accounts receivable days lengthen out. Combined with overleveraged balance sheets, it resulted in the tragic end of many companies.

“Cash flow is the lifeblood of any company, and managing it is the key to a company’s longevity,” says Edward L. Wood, CTP, regional vice president of commercial lending for National Bank and Trust.

Smart Business spoke with Wood about cash flow management strategies that can prevent companies from becoming overleveraged.

What are the areas of cash flow that a company can control?

The key component to managing cash flow is managing the inflow and outflow of money. A company needs to focus on three areas: accounts receivable, inventory levels and accounts payable. You want to shrink your turnaround days as much as you can for your accounts receivable and inventory levels. The shorter the turnaround on your receivables, the quicker you are collecting cash and putting it back into the company.

For payables, an outbound form of money, the strategy is the opposite. If you are paying your vendors in 10 days, you want to lengthen those payment periods to 30 days. This creates cash in the company because you are slowing down the outbound flow of money from the company.

Every industry varies somewhat on its payables strategy. Have a discussion with your lending officer because he or she can give you a benchmark of your payment strategies compared to your peers to give you an indication of where you should be. But generally, getting your payables out in 30 to 35 days is not unreasonable.

On the inbound side, you need to keep your receivables at the same levels. Less time is better on the inbound side and more time is better on the outbound side.

How should cash flow be tracked?

The main issue is that it needs to be a process that is focused on consistently, not just at the end of each quarter. You need to manage your accounts receivables turn, inventory turn and payables on a consistent, daily basis to know where they are. That is information you can get by using accounting software, or your community bank can take your financials and give you benchmarks.

What are some common cash flow management mistakes?

Particularly on the inventory side, and especially for manufacturing companies, you have to be careful of the inventory you are purchasing and how quickly you turn it around. Buying an expensive piece of inventory and not selling it quickly can tie up cash flow. It is important to buy inventory that you know will have a quick turnaround, not something you have to sit on while you look for a buyer.

On the accounts receivable side, the mistake is not monitoring your how quickly your receivables are turning over. When you make a sale, the faster you collect on your receivables, the faster you put cash on your balance sheet. Making a sale doesn’t do anything for your company until you are paid.

Customers need to focus in on methods that make receiving payments faster. To encourage faster payment, you can increase the cost for transaction types that are slower or offer discounts for faster methods.

On the outbound side with accounts payable, you can have a conversation with your customers about when they should expect to be paid. Vendors will often work with you, which will help to better manage your cash flow.

How can a company improve its cash flow?

Depending on your lender, it is always a good idea to make sure you are using cash flow effectively.  If you have a commercial line of credit, consider a loan sweep that allows you to automatically apply your excess cash against your loan. If you need money, it automatically pulls liquidity from your line of credit so you are not manually moving money back and forth between your loan and deposit account. A lot of financial institutions will charge significant fees for those, but if your bank is doing so, you need to find a bank that is not.

You can also look at your billing cycle in terms of when you are sending out invoices. If you are not offering discounts on accounts receivable, doing so can be an incentive to get paid quicker.

How do you determine what impact capital assets will have on cash flow?

With purchase of any capital asset, the company needs to look at the value it brings to the bottom line. When you buy a piece of equipment, it produces some benefit over time, which is where financing becomes attractive.  If you pay for the equipment in total today, you are putting all of that cash into a physical asset that offers a return over several years. Financing defers the payment of the asset over time to match the revenue coming in from the asset to its debt payments, so you are leveling off the payment structure to match revenue generation.

What products can a bank offer to help improve a company’s cash flow?

Utilizing electronic deposit for deposit transactions is a big plus rather than taking deposits to your bank. You can do this from your office through a check scanner, allowing you to accelerate the collection process, and this lets you know more quickly if you have a problem with a payer.

A lock box is another option. It eliminates the option of having something mailed to company and the need for someone to physically make the deposit. It also accelerates collections.

Edward L. Wood, CTP, is regional vice president of commercial lending and the HCDC (Hamilton County Development Corp.) 2011 lender of the year. Reach him at (800) 837-3011 or ewood@nbtdirect.com.

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If you run a small business that has had difficulties obtaining a loan, there is some good news. Preferred lenders can help businesses navigate through the U.S. Small Business Administration (SBA) loan programs to obtain financing needed for growth and expansion. The SBA loan process can be confusing, and small businesses may experience unknown challenges when applying, such as a collateral shortfall or not enough cash down payment to put into the transaction. However, preferred lenders, like community banks, can help small businesses with this process.

“We’re likely experiencing the lowest interest rates in history,” says Edward L. Wood, CTP, regional vice president of commercial lending for National Bank & Trust. “The ability to lock those rates in for a longer period makes today a compelling time to get an SBA loan.”

Smart Business spoke with Wood about SBA loans and how obtaining one could benefit your business.

What types of businesses can benefit from an SBA loan?

Typically, the SBA’s goal is assist small businesses with their growth and lending needs, rather than large corporations that do more than $100 million annually in sales. However, there are a variety of SBA rules that companies must abide by to qualify for an SBA loan. It is always recommended that the borrower find an experienced SBA lender who participates in the Preferred Lender Program (PLP) and can help you navigate the SBA requirements.

How do SBA loans differ from other loan products?

There are many advantages to SBA loans, including a lower down payment, sometimes as little as 10 percent, which is typical of two SBA programs known as 504 loans and 7A loans. You also can get extended payment terms with these loans. For example, lenders with working capital loans prefer to keep amortizations between 36 to 48 months. Under the SBA 7A guaranteed loan program, many lenders allow longer amortization periods, usually up to seven years, which provides an even greater benefit to the borrower.

Also with a SBA 7A loan, the bank is lending all of the funds for the project and the SBA provides the lender with a guarantee, generally around 75 percent of the total loan amount. These loans offer working capital to fund growth, accounts receivable and inventory.

The SBA 504 loan is geared toward equipment financing and/or owner-occupied real estate. With this type of transaction, the borrower has two loans — one with the SBA who finances 40 percent and the second with the lender who finances 50 percent. The borrower is only required to provide 10 percent equity in the project. Under the 504 program the lender maintains a first mortgage on the collateral while the SBA takes a second position. Additionally, with the SBA 504 loan, the borrower should be aware there are prepayment penalties within the first 10 years.

The effective rate for the SBA portion of the 504 loan in August 2012 was a fixed rate of 4.45 percent. The lender portion is usually handled with a five-year adjustable rate.

What is the process to obtain an SBA loan?

The process starts when a borrower contacts his or her preferred lender. The lender will assist him or her through every step of the process. The lender drives SBA 7A loans and capital lines of credit from start to finish and submits the transaction to the SBA for approval. For SBA 504 loans, the lender will also work with a third-party non-profit entity that will underwrite and submit the transaction to the SBA for approval.

To apply, simply provide the same information you would for any other type of loan. Lenders are looking for the last three years of business and personal tax returns of the guarantors and accountant-prepared financial statements covering the three previous years. A personal financial statement from each year and an aging of the business accounts receivable and payables are also needed.

Why is now a good time to apply for an SBA loan?

The uncertainty in the interest rate market makes today a compelling time to apply. Because of this uncertainty, the SBA loan becomes an incredibly viable product that could allow you to fix part of your total debt service for up to 20 years. Getting longer amortizations on working capital loans are compelling because it allows the borrower to stretch payments out over a longer period of time, thus reducing your debt service requirements.

There is also uncertainty in the market, not only in terms of where interest rates will head but also where inflation will be and the debt level the U.S. has taken on. While interest rates will rise no one can be sure when that will happen, so it is to a company’s benefit to act now.

How can working with a community bank to obtain an SBA loan be beneficial?

A community bank has the ability to better execute an approval. There are fewer people at the top involved in the approval process than at a larger bank.

Depending on the type of transaction, it could take three weeks to get an approval once the lender receives all necessary information. Community banks are well suited to obtain all the necessary information upfront, which can help avoid delays.

Edward L. Wood, CTP, is regional vice president of commercial lending and the HCDC (Hamilton County Development Corporation) 2011 lender of the year. Reach him at (800) 837-3011 or ewood@nbtdirect.com.

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In today’s economic environment, businesses have to get the most out of their employees and remote banking allows employees to focus on tasks that benefit the business. By eliminating the need for them to leave the office to make deposits and handle other banking tasks, businesses can save time and increase productivity, says Stephen Klumb, senior vice president and chief lending officer for National Bank & Trust.

Remote banking also offers a high degree of accuracy and control because you’re handling your own transactions, you are able to keep a close watch on which transactions have occurred and when they are finalized.

“It’s almost like being your own banker,” says Klumb. “You’re making transactions, moving your money around, setting up automatic bill paying and handling your own deposits, all from your own office.”

Smart Business spoke with Klumb about the benefits of remote banking and how it frees businesses to customize their banking relationship.

Are companies limited to banking at the nearest location?

Some people have the mindset that walking into a physical location to service their banking needs is necessary. That may be true for retail customers, but from a commercial perspective, it really isn’t. Our commercial team goes to customer locations, and thanks to technology, we can do far more for them. Commercial customers can, for example, use a remote capture system to make deposits. With remote capture, a small machine at your business allows you to run checks through and get credit for the amount at your bank the same day.

Another remote banking option is Automated Clearing House, or ACH. This secure payment system allows your customers to send payments they owe you electronically from their bank directly to your bank account, speeding up your accounts receivable. You can also set up the reverse, allowing transactions to leave your account and be automatically received by your vendors.

How can a business keep track of its remote transfers?

Commercial banking customers can track their transfers with online banking. Those customers can sit at their computer, sign onto the bank’s website with total confidence that their information is secure and discrete, and transfer money and make payments.

When it comes to payroll, Positive Pay is an option in which no checks are paid until you release them, which helps eliminate the possibility of fraud. You can also get involved in Bill Payer, which sets up regular, automatic payments of bills, similar to what consumers use for personal use. Further, just as consumers can access cash and make deposits 24 hours a day through ATMs, so can businesses. Commercial customers can also use mobile banking on a phone for their business needs, and new apps are making this method increasingly popular.

Is there any reason a business owner would need a physical bank?

In regard to having a need for a physical bank, your commercial lender should set up meetings once per quarter to keep up with what’s going on with your accounts both past and present. But you can also go online, pull up your accounts, your transactions and your balances, and you’ll see the same things a branch manager sees. This service, and others, like Remote Capture, will minimize the trips made to a banking office.

In the event that you’d like to discuss a grievance, there is a number you can call that will put you in touch with a representative to handle it.

Most borrowers don’t call a branch if they have a problem with their commercial loan, they call their commercial lender. Your assigned commercial loan officer is available to handle any issues, typically within 24 hours, and can be accessed by cell phone and email.

Today, when closing loans, many lenders will go to the customer, as a lender’s office is usually his or her cell phone. Lenders will most often meet business owners where they work to close loans or review documents. There also may be occasions when a business owner might not want employees to know he or she is working with a bank, so lenders can meet them anywhere they’d like.

Are there costs associated with remote banking services?

Often, the costs associated with remote banking services are absorbed by the time and extra costs often incurred when not performing these activities electronically. Other costs may vary depending on banking activity and account relationships. Overall, most customers find remote banking services to be a very cost effective part of their financial practices.

How computer savvy do a company’s employees need to be to utilize electronic banking services?

Most companies on the commercial side have accountants or managers who are very knowledgeable when it comes to these things. And once they’re trained to use the systems, the benefits most often outweigh any anxiety.

However, to ensure a smooth transition, when a bank sells the service, it generally teaches customers how to operate them. For example, with remote capture, bank representatives will explain how to operate the machine when they bring it to the client’s place of business and they’ll leave a phone number for questions.

With online banking, there is a tutorial available to walk the user through the program, and in some cases, the person selling the service will take along a laptop to show those at the business who will be using the service how the programs work.

Stephen Klumb is senior vice president and chief lending officer with National Bank & Trust. Reach him at (800) 837-3011.

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Determining how much credit your business can obtain or should have can seem like a complicated endeavor for businesses. However, your banker can simplify the process and help you determine that figure, says Stephen Klumb, senior vice president and chief lending officer, National Bank & Trust.

“A line of credit is a commitment by a bank to a borrower to advance short-term money, working capital or receivables financing over a specified period of time for short-term working needs,” says Klumb. “And that line of credit can be estimated through a fairly simple formula.”

Smart Business spoke with Klumb about how to work with your banker to determine your line of credit and how to identify the right banker to help you through the process.

How can a business determine what its line of credit should be?

Take your total estimated annual gross revenue (sales) and divide by 365. That gives you your daily cash need. Next, determine your total number of accounts receivable, plus inventory days on hand (Use of Funds) and subtract your accounts payable days on hand (Source of Funds), and this is your usage. Multiply your daily cash need times the usage (accounts receivable days less accounts payable days) and you will get the estimated line of credit needed for your business.

For example:

Sales ............... $9,125,000/365 = $25,000 (daily cash need)

Accounts Receivable days on hand ............. 68 days (usage of cash)

Add Inventory days on hand .................... + 30 days (usage of cash)


........................................................................98 days (usage)

Less Accounts Payable days on hand ........ - 52 days (source of cash)


...................................................................................46 days

Multiply by usage ................................ x $25,000 (daily cash need)


..........................................................$1,150,000 (estimated need)

Your company estimated line of credit need is now known ($1,150,000 in the example) and that number sets the tone for discussion in terms of the amount of money you need in working capital to operate your business.

Is this number a moving target?

Generally, it’s a one-year commitment. Most customers do an annual projection, but if, for example, the business picked up a new contract or lost an existing contract, then it would become a point of discussion. A new contract could require an adjustment to the working capital needs. However, the number is not always a moving target. You might instead do a guidance line, which is a little extra during a period of time that eventually comes back to the normal operating line.

Is there such a thing as too much credit?

Absolutely. Too much credit, when not monitored, could become a problem if you’re allowing your receivables to go out too far. Talk to your bank about what your peer group average receivable days are and to get perspective on where you fall within that group. If your receivables are coming in later than those of your peer group, a good bank would recommend that you address your internal collection process to get your receivables in more quickly; otherwise, you’re borrowing money and the additional credit is taking up profits.

How do banks determine what credit line they’re willing to extend?

Because they’re giving you a line of credit to operate, they need to know your liquidity, so they’re going to use a current ratio. Current ratio is determined by taking current assets minus current liabilities, or a quick ratio, those assets that can be easily turned within a short period of time to produce cash.

Sometimes a line of credit will be established, but if it never goes to zero during a 12-month cycle ,you might lower your line and make a portion of it term debt to get back in balance between term debt and line of credit debt.

What can a company do to set itself up for a line of credit?

The best way to do it is to be on top of your accounts receivable aging report. Monitoring your accounts receivable for payment and having those reports available lets the banker know you are aware of where your receivables are. Having receivables crawl into 90 days could affect your operating line and won’t be counted as collateral.

What are some common mistakes businesses make when applying for a line of credit?

Not having their controller or accountant in meetings with their bankers. When you’re talking to a banker and he’s asking specifics, having the people there who know the answers makes the banker feel more comfortable. Meetings should include the owner, accountant and CFO for lines of credit or term debt. And be honest with your bankers. If you’re having a problem, the bank’s going to know, and it gives you the opportunity to explain why it happened.

How can your choice of bank affect how creditworthiness is determined?

A very large bank may use systems to determine credit. In short, the commercial lender feeds information into an often-automated system, and it comes back with an answer.

At community banks, generally speaking, there is individual involvement. They don’t use those types of systems and instead give more attention to the numbers and to understanding the individual business’ situation.

Regional banks are compartmentalized by market size and often have multiple officers handling each market. Once a business jumps into another category, it has to get a new loan officer. Today’s market is not just about being a lender, it’s value added. If your banker can’t bring value to the table, the bank is just a commodity, and the lowest price wins. Community banks provide a higher value because they are selling the value that can be brought to the relationship going forward.

Stephen Klumb is senior vice president and chief lending officer with National Bank & Trust. Reach him at 1-800-837-3011.

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