See what bankers look for when evaluating your business for credit
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[Mark Kapelka] Credit's necessary for your business. Credit's necessary because you never know what events are around the corner. You never know if your clients are going to start paying you late. How will you make payroll? You never know when that piece of equipment is going to break. So when it breaks, do you have the resources available to repair it or to get a new piece immediately? So, having access to credit and having a relationship with the banker is very important.
Your banker needs to understand what the end game is for you and your company. Do you intend to sell the company? Do you want to pass it on to family? What are your plans? Because that is key to helping us structure a facility that's most appropriate for you and your company.
Business owners oftentimes change their perspective on what the end game is. Sometimes they may start out thinking that they want to grow it and grow it and grow it and ultimately they decide to sell it because they may not have heirs at the end. Your bank or SunTrust can help you determine an exit strategy and help you facilitate that exit strategy.
Your banker wants to understand the history of the company, where it's going, and where you stand. They want to know who you are, your ability and willingness to support the company going forward. They want to understand your passion, your sincerity, driving the business and know that your company is in competent hands.
Transparency is important because bankers know that events happen, that problems occur, and they don't want to hear it from an outside source. They don't want to find it out on their own. They want you to come forward and tell them that you're having problems or that you had a covenant default, that something is going wrong with the business because then they can help you—they can trust you and you can help form a response and a solution to the problem.
Your banker's going to ask you for a lot of information as you consider obtaining credit. Typically that's going to look like 2-3 years corporate tax returns, personal tax returns, business financial statements, personal financial statement, so a host of things to help make the decision. We’re going to want to know who you’re doing business with, your supplier listing, what your credit history has been, who your clients are and who your suppliers are.
Projections are very important to a bank because it shows your ability to forecast what your plans are for the future. Now, we make decisions based on the past as well as the future, but having a glimpse into the future helps your banker prepare and understand how your credit need fits into that picture.
A client should be able to provide projections for the next 12-18 months, really nothing more beyond that because a 3-5 year plan is so far out that it may not be helpful.
Profitability and performance trends are really key because we're looking at how the company has performed in the past to be able to identify how it's going to perform in the future.
Management stability is also important because the bank wants to know that there is a back-up plan, that there's bench depth in the event something happens to you.
When companies are incredibly profitable, it's that there's a tendency, a natural tendency, for borrowers to take a lot of money out of the company. They've invested a lot. They want to take it back out. There is a fine line and a good mix between debt and equity. And one of the common mistakes that borrowers make or that principals make is they tend to take too much out of the company instead of retaining the profits. A good business owner understands that the best investment he can make is investing back into his own company and not putting it into a third party.
Credit is a necessity for growing businesses. Watch this video to get tips from a SunTrust expert about how to approach the credit conversation with your banker, and what to expect.
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