What a banker looks for in a borrower

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As your company grows, you may look for money to buy vehicles, equipment and inventory. Applying for credit can be frustrating. The first place you’ll probably look is a bank. Bankers’ first priority is to protect their loan portfolios and earn a competitive return on their loans, so you need to give them many reasons to feel comfortable with you as a borrower.

All business loan applications have some basic information in common. Here are some universal questions: Why are you applying for the loan? Who will be managing the business? What will you use the funds for? What assets do you need to purchase? What is your personal background?

Once you submit the application, the bank will ask for a loan package. The following items are usually required in the loan package:

• Owner’s personal net worth statement. The bank will usually give you a template to present the information. It may be a good idea to have your CPA complete this form.
• Three years prior personal and business tax returns. Most businesses are taxed as either partnerships (including LLCs) or corporations (S Corp. or C Corp.) and have tax returns that are separate and distinct from the personal tax returns of their owners. The bank will require a signed copy from each year. In a few cases, a business may be taxed as a sole proprietorship or a single member LLC. In this case, the personal tax return contains the profit and loss statement of the business on the Schedule C form. Again, the bank will require signed copies of these returns.
• Most recent profit/loss and balance sheet. If you’re using QuickBooks, these reports are easy to produce. Again, it’s a good idea to have a CPA look at the interim reports prior to submission.
• Three-year budget. The main purpose for a budget is for the banker to determine if you are serious about your business. While the budget may or may not come to fruition, all well-run businesses budget for the future.
• Most current A/R, A/P aging reports. The accounts receivable reports will come from your dispatch program or general ledger program and should be aged 30, 60, 90 days. The accounts payable reports also will come from your general ledger program and should also be aged.

The banker will use these documents to assess risk. He will perform a ratio analysis. Important ratios include interest coverage, profitability and return on investment. In this analysis, he is determining if you are creditworthy, how much debt you can afford and what collateral is available to secure the credit. The most important concepts here are earnings before interest, taxes, depreciation and amortization (EBITDA) and equity.

Most banks will require EBITDA to be at least 1.25 times debt service (all payments for all debt) and will provide financing up to a monthly payment that will coincide with this payment amount.

Equity on your balance sheet would include all assets minus all liabilities. Equity should be positive. In most instances, since assets are recorded at purchased value rather than fair market value, an appraisal can be done on existing assets. If the market value of assets minus liabilities is positive, your company may be healthier than what your balance sheet depicts.

The bank will require you to submit periodic financial information verifying that your ratios are within the terms of the loan or credit line agreement. If your scores fall below the covenants described in the loan document, you can be put on a “watch list” whereby the bank will not lend you any more money or allow you to draw on your credit line. In an extreme situation, the bank has the right to call the loan. Banks try not to let a problem get to this point, but these options are open to them. So, prior to establishing a banking relationship, it’s a good idea to employ the services of a competent CPA.

A strong banking relationship is vital to growing a business. Proper planning and financial management are the keys to a healthy relationship. Make sure you can meet the terms of the agreement and treat the relationship as one of the most important factors in your success as a growing business.