How to identify the right banking partner for your technology company

Since 2009, there has been significant growth in the number of new technology companies as a result of an increased amount of capital available to entrepreneurs through venture capital, growth equity and corporate investment.

Technological advances have made it easier for companies to create and scale their businesses, and has contributed to the amount of new tech companies present today.

But what about the actual business of creating these innovative products? Most startup companies face a plethora of administrative challenges. Investor-backed technology companies typically have a finite amount of time and capital to create value and attract subsequent equity investment. As a result, they are forced to be thoughtful when selecting service providers.

Smart Business spoke with Peter Haman, Vice President and Relationship Manager for the Technology Banking Division at Bridge Bank, about what technology companies can do to identify a suitable banking partner.

Where should technology companies begin their search for a bank?
With over 6,000 banks in the U.S., there are only a handful of banks that provide complete banking services to technology companies and even fewer that do it consistently.

Within the small group of banks that do provide treasury and credit services to technology companies, many dedicate more time to providing services to investors or the investors’ funds. Technology companies need to consider a bank that has a primary focus on what it does rather than those banks that support the broader technology industry.

Second, once the companies move beyond the limited scope of banking options, there are a number of operational challenges that are unique to technology companies. For most seed to early-stage companies, the primary goal is validating the product or business model through an initial product launch or through early sales traction.

Given these goals, combined with the traditionally limited resources these businesses have to employ a full-time finance professional, banking becomes a low priority for early technology companies. Having a banking partner that has the experience to recognize these priorities and can help guide the founding leadership team is important.

Equally important is selecting a business bank that has an intuitive platform and a responsive relationship team that acts as a trusted counselor to the leadership team.

What happens as the process to grow the business moves ahead?
As technology companies validate their business models, the priorities for the business often shift to boosting sales as a way to attract further investment.

Scaling rapidly can create several operational challenges. So the third piece of the puzzle should be to find a bank that can identify the business’s growth trajectory and proactively recommend treasury solutions to help address and automate part of these operational burdens.

During this same time, business banks are able to begin extending credit given a company’s sales traction or capital investment by institutional investors. The type of credit most often provided solves two main challenges with scaling companies: working capital and runway extension to the next equity event.

Technology companies should seek out a banking partner that can tailor credit solutions to the business objectives and anticipate future capital needs.

Finally, when technology companies begin to reach scale and they can dedicate more time to long-term objectives, their banking partner should be strategizing and collaborating with the leadership team to ensure the appropriate products and services have been implemented to meet these long-term goals.

A bank specializing in technology businesses should be able to asses an organization and recommend account structures and services to best meet the client’s needs. The type and amount of credit a bank can extend impacts a later stage technology company’s ability to execute on strategies or implement cost-effective capital solutions.

Most technology companies are challenged with universal issues whether it’s fundraising or solving growing pains. An experienced business bank should be able to identify these challenges and deliver the appropriate solutions no matter the life stage or market segment that applies.

Insights Banking & Finance is brought to you by Bridge Bank

Why good times are the best time to get a line of credit for your business

One of the biggest mistakes you can make as a business owner is to put off securing a line of credit. Sales are growing, product is flying off the shelves and business couldn’t be better.

It may not seem like it, but it’s actually an ideal scenario to sit down with your bank and discuss a line of credit, says Ben Fargo, Vice President, Capital Finance at Bridge Bank.

“The best time to get a line of credit is when you don’t need it,” Fargo says. “When you’re profitable and your balance sheet and income statement are strong, you’re going to be able to negotiate the best terms for your line of credit.

“Think of it as an insurance policy for your business. When you wait and you get into a situation where you’ve gone from being profitable to losing money and you’re trying to figure out how to turn that corner, you’re going to have a much more difficult time.”

Smart Business spoke with Fargo about what to consider when pursuing a line of credit and what it should be used for once you get it.

What are the most common reasons to seek a line of credit?
Typically, a line of credit should be used for working capital purposes and short-term needs. A good example would be consulting companies. They have employees they need to pay today, but often they are not going to be paid by their customer for 30 days. These companies can leverage a line of credit to make that payment today.

One of the worst things you can do is to use a line of credit to purchase new equipment. Let’s say you have a $1 million receivable-based line of credit and you leverage that on day one to buy $1 million worth of equipment.

Now you have that $1 million debt outstanding — and not revolving or amortizing – and a real need arises to cover a critical expense in your business. This unexpected need is exactly what a line of credit is designed to cover, but your line was used to buy equipment — and you no longer have the borrowing capacity.

What are important considerations when negotiating a line of credit?
Think about the size of the line of credit and whether it’s something that will accommodate the growth of your business.

Does the borrowing formula that the bank is proposing allow you to maximize the amount that you can borrow against the asset — whether that’s accounts receivable, purchase orders, inventory or some other type of asset? As a borrower, do you understand what’s being considered as eligible for you to borrow against?

Say your company has $1 million worth of receivables. At an 80 percent advance rate, this would imply $800,000 of availability. But what is considered eligible versus non-eligible? Does your business pre-bill customers and send an invoice before you’ve delivered a product or service?

If you’re not going to deliver for 30 days, is the bank going to consider that receivable eligible in your borrowing base? Depending on the eligibility criteria, the amount that you can borrow may be drastically different than the amount of the commitment.

Another question, believe it or not, is whether you can actually borrow on the line of credit. Is that $1 million of receivables really $1 million of borrowing capacity or would drawing on the line of credit potentially cause a covenant default with a term loan?

Maybe the increased draw on the line creates an increased interest expense which impacts your company’s ability to meet a required debt service threshold, or perhaps the draw would cause overall debt levels to be too high, causing a breach of a leverage covenant.

What’s an important piece of advice to avoid problems with your line of credit?
Make sure you absolutely understand the terms and conditions of the line of credit. Whether that’s financial covenants or the computation of the borrowing base and what you’re allowed to include versus what isn’t included.

That will ultimately impact how much you can borrow. Don’t be afraid to talk to your banker about how the line of credit is structured. Make sure the bank understands your business so the line of credit is legitimately adding value and can help your business versus hinder it.

Insights Banking & Finance is brought to you by Bridge Bank

Venture debt can be a good option to fund medical device technology

Venture debt has long been a favored source of non-dilutive capital amongst life science companies, particularly medical device companies. Why?

Venture capital investing in medical devices and diagnostics has traditionally lagged biotech by more than half, says Justin McDonie, senior vice president and managing director at Bridge Bank.

“Total venture funding for medical device companies declined following the 2008 recession and never recovered, even as funding has rebounded elsewhere,” McDonie says.

According to a recent MoneyTree Report by PricewaterhouseCoopers (PWC), a total of $2.8 billion was invested by venture capitalists in medical devices and diagnostics in 2015. That’s the highest annual sum for medical device and diagnostic venture investments since 2008.

However, investments in this sector are poised for another down year with $1.1 billion invested across 119 deals through the first six months of 2016. Compare this to biotech with $3.7 billion invested across 224 deals for the same six-month period.

“While medical device development follows a well-established development path, the length of time required for 510(k) clearance and PMA approval has increased,” McDonie says. “According to a Stanford University report, it’s estimated that the average cost to bring a low-to-moderate 510(k) product from concept to market is $31 million, while high-risk PMA costs average $94 million.”

Smart Business spoke with McDonie about how the lack of venture capital dollars for medical device companies creates opportunities for venture debt to augment venture capital dollars to fund medical device technologies.

What other factors have driven the investment disparity between medical devices and biotech?
There is a lot of reimbursement uncertainty in the U.S. In addition, under the Affordable Care Act (ACA), a new medical device excise tax was enacted which is a 2.3 percent tax on revenue for device manufacturers. That’s a pretty regressive policy.

The tax is under a moratorium for two years, but in terms of the venture capital view, and because it is viewed as regressive, it’s a tax that hampers the cash flow of cash-burning startups and thereby hinders the length of time that a VC firm has to recoup its investment dollars.

Several venture capital firms have said they’re not going to invest in medical devices anymore or have pivoted towards investing in later-stage device opportunities where there is a clear reimbursement pathway and shorter exit horizon.

Investors are not willing to spend tens of millions of dollars fighting a reimbursement battle. If you look at biotech valuations versus medical device valuations and the multiples on return, those multiples are significantly less for medical devices than biotech.

With the uncertainty in the reimbursement world as it relates to devices, coupled with the lack of venture dollars and LP dollars that are allocated to device venture funds, funds have either turned toward biotech only or later stage medical device or health care services.

What is the key to maximizing the value of venture debt?
You need to be clear about the problem you are trying to solve by adding leverage to your balance sheet. Is it pure balance sheet bolstering for a company that might be entering into strategic negotiations? Or is it bolting on capital that is going to provide runway extension?

Often, venture debt is funded alongside an equity component; you can augment with equity to reach the same financing target, allowing VC’s to keep more equity dollars on reserve should future funds be needed. For example, and for the sake of simple math, if a company raises $12 million and is burning $1 million a month, it will have 12 months of runway.

A $6 million debt deal is going to provide that company an additional six months of runway. For a commercial stage company, that six months could be very meaningful as further revenue growth could drive a higher valuation at the next equity raise.

There are various development milestones where debt can play a meaningful role in helping companies reach critical inflection points in a non-dilutive fashion, such as PMA approval or 510(k) clearance. The key is to understand the value of venture debt and be clear about what it gets you without over leveraging your business. It has to buy you something meaningful. Otherwise, there is no point in doing it.

Insights Banking & Finance is brought to you by Bridge Bank

What you can do to protect your company against FX volatility

Business leaders need to understand their exposure to foreign exchange (FX) volatility and the risk it presents to their companies, says Gareth Sylvester, senior vice president and foreign exchange advisor at Bridge Bank.

“First and foremost, it’s about understanding what your actual exposure is; quantifying it and then understanding your own risk tolerances and desired outcome for managing the risk,” Sylvester says.

“Moreover, it’s essential that FX risks be proactively versus reactively managed. While there is never a ‘perfect hedge,’ even establishing the simplest policy to mitigate a portion of your exposure is better than no hedge at all.”

You need to be able to position your business to tackle FX risk from a position of strength rather than making decisions due to fear, lack of preparation and urgency, Sylvester says.

Smart Business spoke with Sylvester about FX volatility and what you need to know to safeguard your business.

What are the greatest concerns for businesses when it comes to FX exposure?

In the case of most treasurers, it is the financial impact on the businesses from excessive FX market volatility or a rapid appreciation/depreciation of a currency that creates the greatest of concerns. Regardless of whether you are importing or exporting, the fears remain the same.

What is the impact on my payables/receivables from FX volatility and how does this affect my competitiveness from a product pricing perspective within the region I operate?

While most treasurers will factor into their budget a degree of FX volatility, a significant adverse FX swing can result in, at best, a small decrease in the value of your expected receipts. At worst, it can result in your product or service no longer being price competitive in a certain geographical region.

Where should a business leader begin in trying to proactively address these risks?

The first thing is to identify in what form the FX exposure risk arrives. Is it transactional, translational or economic in nature? In most instances, businesses are faced with transactional risk wherein the value of their payables/receivables is affected by FX market moves. Another key question you want to be sure to answer is when does the business recognize a transactional FX exposure?

Does it happen at the time an invoice is received or submitted, when cash is paid or received, or on historical business trends and volumes? Once the exposure is identified, the second stage is to measure and quantify this risk and the potential impact to the business. Depending on the size of the international exposure, some organizations will also assess the impact on their margins in order to assess risk.

The next step is to determine your goals for managing the FX risk. Are you looking to minimize earnings volatility, for example? You also want to gauge what level of risk exposure the company is prepared to take.

This will help calculate the correct volumes to be hedged, over what time horizon and perhaps even the hedging instruments. Lastly, and crucially, it is imperative to measure the effectiveness of the hedge program.

Did you achieve your goals? Did it minimize the effects of FX volatility? If so, that’s great news, but you’ll still want to review again in three to six months. If not, you need to adjust your hedge approach and review it again in three months.

How difficult is FX management in terms of the need to go back and make adjustments as conditions in the market change?

Any FX hedging program should have clear and defined objectives. The FX policy is intended to be a living, breathing document. A hedging framework and policy document should never be drafted, signed off, filed and ignored. It is paramount that periodic effectiveness reviews are conducted to ensure that the key objectives for managing the FX risk in the first place are being met.

Failure should prompt a process review in order to determine where the inefficiencies are arising and what can be done to rectify these concerns.

Insights Banking & Finance is brought to you by Bridge Bank

Be clear about your company’s needs before pursuing a new line of credit

One of the keys to securing an appropriate line of credit for your business is being clear about the problem you’re trying to solve, says Kelly Cook, senior vice president, Technology Banking Group at Bridge Bank.

“Are you trying to fill a cash flow gap between when you invoice for your product or service and when you actually get paid by the customer?” Cook says.

“Or are you trying to solve another problem in your business where you might be looking for additional cash to hire new salespeople or more operations team members. Those represent different types of cash needs that may require a term loan or even an equity investment.”

Clarity of purpose gives your bank or lender a solid starting point to help you find the right solution for your financing need. It also helps you avoid getting the wrong facility in place that could make it harder to obtain credit in the future.

“The more informed your bank or lender is with regard to the health of your business, your needs and your future plans, the better they can help you access additional borrowing capacity or financing to work out of a troubled situation,” Cook says.

Smart Business spoke with Cook about how to determine the appropriate line of credit for your business.

What are the best uses for a line of credit?

A typical line of credit is a working capital, revolving facility used to finance a short-term asset such as accounts receivable or inventory.

This differs from a longer term, more permanent type of financing like a term loan or equity that might be used to finance an asset with a longer life such as a new office or an increase in staffing. You want the type of financing to match the type of cash needed in the business.

What should you consider before pursuing a new line of credit?

First off, be sure that you clearly outline any existing debt or credit facilities for your prospective lender. Fully disclose any existing leverage, either through a bank loan, a finance company, or any other note or convertible note.

Your existing debt profile will have a strong influence on what a new lender can structure for your business. Depending on what you are trying to achieve, it may make sense to pay off the existing credit facility with a new one.

Where your business is in its life cycle is another factor which could affect the structure of your loan and the type of line of credit you can obtain. If your business is established and growing, you’re likely to get more favorable terms with a credit facility that provides flexibility as well as adequate borrowing availability.

If you don’t have a strong track record, it doesn’t mean financing is unavailable. It could just mean that you might start with a more restrictive structure or higher pricing for a period of time.

How important is a financial forecast in your ability to get a line of credit?

You and your senior leadership team should develop a forecast that represents your best estimate of how the business is going to perform going forward.

A lender is not only interested in where the company has been, it also wants to have a sense for what the future looks like.

Everyone understands that actual future performance will not exactly match the forecast, but the forecast should show performance that can support the line of credit being contemplated.

What is a line of credit collateral audit?

Lenders will often require a periodic collateral audit — a third-party checkup on how a loan’s collateral is performing and a profile of a business’s customer base.

For an accounts receivable line of credit, the audit will evaluate accounts receivable performance — validating that invoices are being issued against contracts or purchase orders, that they are being issued per contract terms and that payments are coming in per contract terms.

The audit will also measure customer profile information such as customer concentration. ●

Insights Banking & Finance is brought to you by Bridge Bank.

Why your search for an investor has to be about more than just money

Success in the world of biotechnology and life sciences requires a level of patience that is foreign to most types of businesses and industries.

On average it takes 10 to 12 years and over $1 billion in capital to get a new drug from the laboratory to the market to be sold to consumers, says Rob Lake, senior vice president and head of Life Sciences at Bridge Bank.

With such great effort needed to get your product out the door, you want partners you’ll be comfortable working with for extended periods of time. When you face challenges, as most growing businesses do at some point, the relationship you have with your financial partner can go a long way toward determining your future.

“Some lenders tend to over steer,” Lake says. “So on top of whatever is already going on at your company, a relationship with an inexperienced lender can make it that much more difficult to manage your business.
“That can be very stressful for a management team and an investor group trying to position your company to work through the issues and get back on track.”

Smart Business spoke with Lake about the real value of selecting a lender or bank that truly understands the challenges your business faces.

What should you consider when looking to raise capital in the life science industry?

You need a lender who understands your business. A standard bank that does commercial and industrial lending is likely to underappreciate the peaks and valleys of a life sciences company, such as navigating through regulatory agencies or the uncertainties of clinical trials.

There is such a thing as ‘greener capital.’ A knowledgeable lender knows how to react to bad news, and how to chart the best course of action to keep things on track. It’s like piloting a small plane. If there is turbulence, you’re not going to want to over steer in one direction or the other to try to stabilize the aircraft.

You want to keep it as steady as you can and it will stabilize once you get through the bad weather. The same applies to working with a lender that clearly understands the issues life sciences companies face and will work through occasional challenges along the way to help the company achieve its goals.

What are some key things to know before you meet with a lender?
You need to think about what you would do if things with your business don’t go according to plan and compare it with the underwriting rationale of the lender. Lenders will typically underwrite to a downside case to explore that scenario.

What if you do not get approval on an expected date and it takes another year to get that approval? How would such a delay affect your company financially? How much more money would you need to raise? What will it take to get there? Do you have the resources to get there?

The base case is a little more optimistic scenario and the downside case is if the wheels completely fall off. The more likely case is a third option in which the wheels don’t totally fall off, but maybe you have a flat tire. How do you fix it and get through that scenario?

It’s helpful to hear the lender’s mentality as they go through the downside process.  There are lenders in the space that offer more favorable terms (i.e., more capital or lower cost); however, it could cost more money in the long run (fees and legal expenses) if they haven’t thought through what the downside looks like.

What are lenders looking for in a borrower profile?

Lenders like business models that are diverse and have novel intellectual property supported by an underlying ‘platform technology.’ Multiple shots on goal help the lender mitigate risk.

They also want to understand the value proposition and see that it makes sense from a commercial viability standpoint. Ultimately, does the product and or service you’re developing address an unmet need?  Improve patients’ lives or clinical outcomes?  Save the health care system money?

Validation is another important attribute lenders like to see. This could come from many sources including the quality and reputation of your investors, strategic partners, a positive reimbursement decision or revenue traction.

Insights Banking & Finance is brought to you by Bridge Bank.

Transparency is key to maintaining strong ties with your bank

Communication is the lifeblood of any strong relationship, including the one that develops between a business and its bank.

One of the keys to maintaining that strength through the ups and the downs is the willingness of the business leader to remain transparent when the times turn tough, says Jeffrey M. Whalen, senior vice president and market manager for Specialty Markets at Bridge Bank.

“Your bank doesn’t know your business as well as you do,” Whalen says. “When a difficult situation arises, you need to keep your bank engaged in what’s happening so you can work together to find solutions. Companies get into trouble when they try to hide problems, putting the bank in a difficult spot.”

Transparency builds trust and boosts your chances of getting the help you need, when you need it.

“If you reach out to your bank when you run into trouble to set up a meeting, a relationship-oriented lender is going to reciprocate by reaching out to you on a regular basis to check in and see what it can do to help you,” Whalen says. “The strength of that relationship is critical for the financial well-being of your business.”

Smart Business spoke with Whalen about how to build a strong relationship with your bank.

What are some key steps you can take to increase the likelihood of securing a loan for your business?
Show your financial statements to the bank, even if your company has not been profitable. The numbers are what they are and you don’t want to hide them. Every company faces challenges from time to time. The key is your ability to develop a plan to turn things around and work with your bank to fine-tune that plan to give it the best chance to succeed.

Within most banks, there are different divisions that might be better suited to helping a company that finds itself in recovery mode. The difference is that some of these groups might be more aggressive in the way they collateralize your loan.

These groups want to see diversification in your receivables to prove that you’re not too reliant on one customer for your revenue.

If you pursue financing through the U.S. Small Business Administration, the bank will likely want real estate as collateral. The key is that you keep your bank engaged and work collaboratively to find solutions.

The more communication you have with your bank in terms of full disclosure, accurate and timely historical financials and an affiliation with a well-known CPA firm is going to increase your likelihood of securing a loan.

What are some signs that you have a problem with your bank?
If your bank is not checking in with you regularly on the progress or success of your business, that’s a red flag. Another concern is when you have to keep retelling the story of your business to your banker or if you have a new relationship manager each year.

Either they don’t trust you or they don’t understand your business. When those things happen, you’re going to want to have all your data ready and available for the next banker because you’re probably going to need to start shopping for one.

What are some common mistakes that can get a business in trouble with its bank?
When a bank extends a line of credit, there are typically four or five covenants that you cannot violate. If you violate those covenants and don’t have a conversation with the bank about how to get back on track, that is going to get you in trouble with your bank.

A line of credit is extended for a specific purpose and when you use it for other expenses, it can hurt your business. It’s also a problem if you take too much money out of the company and cause the net worth to erode. The bottom line is when you maintain a regular dialogue with your bank, you can avoid many of these difficult conversations. ●

Insights Banking & Finance is brought to you by Bridge Bank

The VC market is taking a pause, but the future still looks bright

Valuations in the venture capital (VC) market are either in decline or flattening out, primarily due to inflated expectations, says Michael David, Managing Director for the Equity Fund Resources team at Bridge Bank.

“Startup companies always have nonlinear rates of progress,” David says. “Companies haven’t performed as well as they had been forecasted and the stable of investors has pulled back. Many are looking at this correction cycle as an opportunity to invest in good companies, but they are not going to pay the valuations they did a year ago.”

VC investments reached a 15-year high last year as the sector capitalized on the relative weakness of other markets. But what goes up must come down again at some point and VC investing has slowed down in 2016.

“Companies that are still burning cash, are not yet profitable and are not growing as much as they were are in danger of not receiving funding,” David says. “There is a much more cautious view.”

At the same time, there is still a great deal of capital available to be invested when the right opportunity presents itself.

Smart Business spoke with David about the state of the VC market and what it means for startups.

What factors are driving the drop in valuation?
A number of firms in the market were driving up valuations, including nontypical investors in the segment such as Fidelity and T. Rowe Price. They came into the market and paid very high valuations for high-profile companies.

Since that time, however, these public mutual funds have written down their investments in some of the later-stage companies.

They have created a revaluation of the market, particularly in the so-called ‘unicorn’ companies they had invested in — startups that are valued at more than $1 billion. The reason is that public valuations are not staying in line with what was being paid on the private side.

There was also an expectation that these companies would go public in a relatively short period of time, perhaps within 12 to 18 months. But the public markets have not been receptive to new issues unless you can show a high rate of growth right off the bat.

A number of these companies that have gone public have missed their forecasts, which affected the whole market, as well as the private market.

What effect does the state of the VC market have on the overall economy?
You have the local Silicon Valley economy and the greater economy. They are related, but distinct. Some of the public companies and even a portion of the private companies are still burning cash, but growing. Investment has declined or pulled back and boards are directing companies to get back to profitability. The result is some companies are looking at layoffs.

This correction or right-sizing of companies is not as big as when the dot-com bubble burst, but there definitely is a movement to get cash flow to break even or to be cash flow positive.

Silicon Valley has a robust economy so while there are some layoffs in the tech sector, it’s not affecting unemployment much. It’s just not quite as robust as it once was.

What’s the takeaway at this point on the state of the VC market?
The environment has changed, particularly in terms of valuations. The VC world is looking harder at companies and their subsequent valuations. I don’t think that anyone thinks there will be a robust IPO market anytime soon. Companies will stay private longer and are going to need the capital to get there.

Rather than just focusing on growth on the top line, there is more of a focus on the bottom line. In 2015 alone, VC funds raised close to $30 billion in new investible capital and if a company hits the right target, there will always be capital available. ●

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During times of economic volatility, your bank can be a great partner

Financial institutions operate at the heart of our economic system and as such, are hyper-aware of market indicators and trends that can affect the credit quality of their customers.

The more opportunities you have to keep your banker up to speed on what’s going on in your business, the better equipped he or she will be to work on your behalf, says Rob Fernandez, senior vice president and business line manager in the Technology Banking Division at Bridge Bank.

“Remember, information is neither good nor bad, it’s just information,” Fernandez says. “Information allows decision-makers to make necessary adjustments, or derive valid reasons to continue to support the status quo.”

Those who have been in business for a while and have worked with an effective banker know what an experienced banker can do to keep the partnership on an even keel. They can help you respond appropriately when changes arise in your business that could affect the structure of your existing credit facilities.

“While you might be concerned about revealing too much, if there is important new information about your business that could impact your financial condition, it will eventually surface,” Fernandez says.

“When it does, and if it’s a surprise to your banking partner, their efforts to help you and your business could be nullified due to the resulting uncertainty.”

Smart Business spoke with Fernandez about the gains that can be realized by allowing your bank to work as a partner in growing your business.

Take advantage of networking opportunities
When your bank partner invites you to lunch or an evening event, go whenever possible. Neither of you might be really into whatever sporting or networking event is available, but you’ll end up having quality time getting caught up on each other’s business, not just yours. You want to know how your banker is thinking about the world too.

If you haven’t been invited out for a while or you’ve turned them down repeatedly, take the initiative and invite them to lunch, a corporate event, a networking party, etc. Trust is developed through personal relationships.

When you meet with your banker in a relaxed setting outside of the hustle and bustle of the workday, you can talk about those big-picture questions that you never seem to have the time to talk about. It’s an opportunity that can pay big dividends for your business.

Don’t try to hide your problems
If you know that your financial reporting is going to reveal a problem, don’t wait until your banker gets the report and then has to scramble to respond to internal questions. Give them a heads up so they have time to prepare a case on your behalf.

Your banker wants the relationship to work and wants to advocate for your business.

When you don’t reveal information that can help them do that, it’s akin to tripping your team member as they run to the hoop to score. You lose credibility and trust with them, and they lose credibility with their senior decision-makers, which ultimately comes back to haunt you for what can be a very long time.

When necessary, consider your options
If you don’t think your current banking partner has the courage, industry knowledge or capability to advocate for you, it might be a good time to consider options. Talk to your peers, CPA and attorney for referrals and get to know who’s out there.

Every region has a collection of very strong commercial bankers. By and large, business bankers are a passionate lot and are very protective of their clients. Banking might seem boring from the outside, but inside it’s a dynamic and highly relationship-driven environment filled with very educated and smart people. Make it personal and you’ll reap the benefits of a strong alliance. ●

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Know your operating cycles and you’ll find working capital easier to manage

Managing the working capital of a business tends to be a balancing act that requires a deft touch in order for the company to operate smoothly, says Michael Hengl, senior vice president and business line manager for Capital Finance at Bridge Bank.

“Working capital tends to be comprised by inventory, cash and receivables,” Hengl says. “Too much or too little of any of those categories can make it difficult to be a profitable company.”

If you have too much cash sitting on your balance sheet, that’s an opportunity cost, he says.

“You’re not investing that cash in a higher yield,” Hengl says. “At the same time, if you have too much inventory, that’s cash that is tied up and you risk inventory obsolescence. You risk not being able to sell the inventory in time and you put a strain on your liquidity that could impede your ability to meet financial obligations.”

When you understand your operating cycle and how money is spent and earned in your business, you are better able to retain control of your valuable working capital.

Smart Business spoke with Hengl about what strong companies do to effectively manage their financial cycles.

How do companies typically get into trouble managing their working capital?
Rapidly growing companies are often susceptible to cash flow concerns because they invest heavily in inventory, only to watch the economy take a downturn that leaves them with a warehouse full of unsold product.

You may also choose to be more conservative with your inventory, but if you cut it too close, you risk missing out on sales when you can’t keep up with demand.

But it’s often that strong growth, which is obviously what every company wants, that can really put a strain on working capital.

A company will say, ‘We’re selling more than we ever have. Why is there such a strain on cash in our company?’ The problem arises when you become too focused on your income statement and your revenue and profits. You also need to look at the balance sheet items and your assets and liabilities. You need to have a balance.

What are some traits common to well-managed companies?
You need to have a strong understanding of your company’s operating cycle from the point that you make an investment or buy inventory to the point that it gets converted back into cash. You need to be knowledgeable about the components and decision points within that cycle.

Work closely with your inventory managers or your product managers to determine how much product is needed. Spend time with accounts receivable and talk about credit terms that are available to clients.

You don’t want to be overly generous where you potentially end up with bad debt and extended receivables. Nor do you want terms to be restrictive to the point where you lose the opportunity to make a sale.

These types of companies tend to be very strong at predicting cash flow and at setting up contingency plans if a client doesn’t pay on time. Do you have a line of credit in place to handle the unexpected? Can you defer a payment to a vendor?

If your company struggles to collect receivables, look for ways to get your clients on a regular schedule. If you’re going to grant extended terms, try to get a concession out of it. Tell the client, ‘We’ll grant you another 30 days, but can you pay 25 percent of it today?’ There are many ways to work with a client.

How can a bank help?
Sit down with a bank’s treasury management department and look at tools that might speed up bill collections or shorten the cash cycle through the use of a lockbox, remote deposit capture or electronic banking.

A bank can also help you identify possible remedies in your reporting or poke holes in faulty assumptions you may have made about your business. Your bank has a vested interest in seeing your business grow and succeed.

Another thing to keep in mind is when you have a bank audit. Don’t be afraid to ask about the results. There may be findings that can help you improve your processes. ●

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