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How to Position Your Company to Access Credit in Today's Environment

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Recent surveys have shown that mid and large size businesses are increasingly more confident about their own continued recovery and success, citing anticipated revenue, profit and headcount increases as well as plans to expand.1  Where does your business fall in the expansion continuum? And why would you want or need credit today?  Whether you see the opportunities to put capital to work or whether you want to take advantage of your improving financial performance, the time to think about access to credit is before you need it. 

Fundamental areas of growth

Three fundamental growth opportunities stand out in today’s business environment:

Capital Expenditures- a growing economy will present organic growth opportunities for companies that have maintained strict expense control during the downturn.  Manufacturers, distributors and wholesalers that are well-positioned will likely see orders increase, which ultimately requires new or additional equipment and larger space for production and storage of additional inventory.  Equipment finance lines of credit and commercial real estate loans are often used to accommodate these requests.  Current interest rates remain attractive enabling many companies to plan for anticipated demand.

Domestic Business Expansion – increasing orders for new business will generate the need for additional inventory.  Short-term working capital may also be required to bridge payment from customers.   Working capital lines of credit secured by receivables and inventory typically meet this need.  Your banker can work with you to structure a facility that takes into consideration your sales and cash conversion cycles enabling your company to grow during a period of expansion.

International Business Expansion –many companies are finding opportunities for expansion outside of the United States.    Emerging markets can create special financing needs including foreign exchange, global trade, Exim Bank financing and international wire transfers. Business owners recognize these needs require special expertise and financing capabilities.   

A perspective on the prevailing credit and growth environment

A recent Federal Reserve Board (FRB) Bank Lending Practices survey clearly indicates that the credit pendulum is shifting with stronger customer demand for some loan categories to fund plant/equipment and augment inventory levels2.  As businesses realize profits and become more stable, banks are showing an increased appetite and capacity for lending to those stronger businesses who can now meet their credit standards.  However, the economic downturn has left its mark on banks which are now looking at lending criteria in a slightly different fashion, wanting to move beyond the financial numbers to understand the business story and meet the principals before offering credit. 

How can your company better position to access credit?

Bankers want to understand your company from the ground up, including positive and negative trends and threats.  You will need a solid narrative around your business story that also incorporates your team’s business background and experience. 

1.    Financial considerations

The ability to provide high quality and timely financial reporting will help your banker assess the relative financial health of your company today.  As your access to credit increases, so will your banker’s expectation with respect to your ability to address the following:

  • Quality of financial statements.  Higher quality financial statements will be expected as your company requires additional debt.  Also, your banker will need to be comfortable with internal financial reporting resources to quickly provide interim financials, aging schedules and a cash budget.
  • Expense control – do you have a solid understanding of fixed and variable overhead?  How much revenue does your company need to achieve to break-even? 
  • Leverage and debt service – what is your appetite for debt and how easily does cash flow cover your obligations?  Will profits be withdrawn or do you intend to maximize return by retaining earnings?
  • Receivables and Inventory– What is the quality of your receivables?  How much bad debt do you experience?  Under what terms do you extend credit?  How quickly can inventory be converted to cash?  Have you appropriately accounted for stale inventory?  Do you have an effective inventory management system?  Your banker will gain greater comfort from the quality of your receivables and your ability to rapidly translate receivables and inventory to cash. .

Here’s how timely information can work to your advantage:  A company that provides rapid response electrical power services during natural disasters needs the ability to deploy several hundred crews and equipment at a moment’s notice.  While receivables are of exceptionally high quality, the company’s cash flow cycle is unpredictable and lumpy.   The Company needs a significant amount of line availability at a moment’s notice to be able to lock-in rapid deployment contracts.  The CFO and his banker work together to develop a line of credit structure which ensures the Company has adequate cash reserves and maintains an extended clean up period.  As a result, the bank is comfortable extending additional credit exposure enabling the Company to favorably compete and out-maneuver its competitors.  

2.    Realistic plans for credit

An important part of your business story is how you are planning to use the financing being requested.  When it comes to providing credit to your company, bankers want more than just ideas: they want facts and details.  What are you planning to do with the funds?  Why does the request make sense?  Will the cash be used for growth initiatives or to assist with temporary working capital?  Will you be taking advantage of short term opportunities that come your way?  Well thought out and reasonable plans for the funds you are requesting are a vital element in procuring the credit you need. 

3.    Credit history

The best predictor of future performance is past performance.  In other words, how have you historically handled your personal and business debt?   This does not mean that perfection is necessary; however your banker wants to be informed about previous rough patches and how you have dealt with other banks.  Remember your banker has access to third party personal and business credit reports.  It’s important they are not surprised.  Transparency goes further to promote your business character than glowing recitations of all that has gone right for you and your company.  A banker wants to know that your business is creditworthy, but also that you are able and willing to talk openly about all situations – with the implication that those open communications will continue throughout your relationship.  Your banker wants to observe your commitment to repay debt in all circumstances. 

4.    Business plan

Your vision for the future of your business is more important than ever in today’s environment.  Is it enough to shore up existing business and cautiously move forward? Or is the time ripe for major expansion to capitalize on renewed demand for your products?  Understanding your recent history, looking objectively at current conditions and making a compelling case for future business plans are an influential part of the background a banker needs to assess your company’s credit opportunities.

Don’t think you need to create a 25 page business plan to express future plans. Important elements to communicate to your banker are:

  • An overview of your past 12 months with 12 to 18 month projections to indicate how you think your business will react to shifts in the economy, product manufacturing or services supplied.
  • A narrative on the competition and how you have/will adjust for any challenges presented.
  • Company owner/principal personal aspirations and long (or short) term exit strategy (are plans to grow, acquire other businesses, sell the existing business or turn it over to heirs?). 
  • What is your back-up plan?  How will you respond in the case of unforeseen circumstances such as the loss of a major contract or entrance of a new competitor?

Leveraging your banking relationship

Build your business story around the four key elements discussed above and your banker will understand your company from the ground up, putting you in excellent position to access the credit you need to make your plans a reality.  Be cognizant, though, that a relationship is a two way street. While your banker wants to understand who you are, and how your business is being run, you should also have an understanding of your banker and the role they play within their bank. 

Make it a priority to meet your banker’s manager and other senior leadership members.  Ask for an opportunity to meet with the credit risk management team so you can tell them your story first-hand.   

A banking relationship begins much like a courtship.  Transparency and honesty should be at the foundation of the relationship. 

Make an effort to use the team your bank has on staff for you. Go to them for advice and expert assistance.  And of course, recognize that a bank is usually looking at your entire relationship, one that can extend beyond a single product or service. 

SunTrust develops a complete relationship with you in order to understand your business needs and deliver sophisticated and flexible credit solutions, and more, for mid to large sized companies across a wide industry spectrum. Ask your SunTrust Relationship Manager how SunTrust can help you grow and strengthen your business today.

 

[1] AICPA Business & Industry U.S. Economic Outlook Survey 2Q 2013, http://www.aicpa.org/InterestAreas/BusinessIndustryAndGovernment/NewsAndPublications/DownloadableDocuments/2Q_2013_EOS_ES.pdf accessed 8/1/2013.

[2] The April 2013 Senior Loan Officer Opinion Survey on Bank Lending Practices, Federal Reserve Board, May, 2013.

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.


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