What is your story?
Securing credit is high on the list of priorities for many business owners, especially during economic expansion. As a business owner, that means you have to think like a banker to prepare a compelling case for the credit request. While the basics – good collateral, a strong balance sheet, improving profitability and strong cash flow - are always important, the intangibles (the business narrative) are also extremely important. An engaging, thorough and well thought-out business story will give your banker greater insight into how you and your company operate, management discipline and practices and long-term plans. All of which will make it easier for a lender to make the decision to grant your company access to credit - before you need it.
The 5 C’s of Credit
- Character – Integrity of the principals- determination to pay (tested by cash shortages, hard times and poor business conditions)
- Capacity – Sufficient power, enough strength and adequate resources to start, maintain and expand operations through the firm’s life cycle
- Capital – Adequacy of funds needed by the business to allow it to operate efficiently in generating cash flow within its competitive business environment
- Collateral – Assets pledged to protect the interests of lender; final source of repayment and protection against loss
- Conditions – Economic and environmental influences on the firm’s financial condition and performance
Key elements of your business story
Corporate and personal financial statements, corporate and personal tax returns, projections and aging reports are all necessities your banker will require. Equally important is the business owners’ level of financial acumen and how you are able to articulate how your business plan translates to your financials. Bankers also want to know:
- Your education, technical and business expertise
- Succession planning and your supporting cast
- Financial/accounting systems
- External resources- financial consultants/CPA
- Understanding of economic drivers affecting your business
- Visibility into the opportunities and risks during the next 12-18 months
- How proactively you navigated the company during the economic downturn
- Your communication style and transparency
- Commitment to the success of the company and willingness to repay obligations
Essentially, bankers want to feel comfortable with you as a business person who understands finances and what it takes to run your company smoothly and efficiently.
Another key element of your story is how your company is positioned within the lens of the 5 C’s of Credit: Character, Capacity, Capital, Collateral and Conditions. Every banker is trained on the importance of these guiding principles. Your banker will consider these factors in evaluating your request. Whether you simply need a working capital line of credit, commercial mortgage or more sophisticated products such as an Employee Stock Ownership Plan (ESOP) or dividend recapitalization loan, weaving your story around the 5 C’s framework can help you prepare for meeting with your banking team.
Communicating your story
Intertwining all these important aspects into a cohesive narrative isn’t as complex as it may seem. The four main topics of interest to your banker include:
- Historical, current and future financial performance
- Financial reporting capabilities
- Business environment and plans
- Integrity and reputation
Historical, current and future financial performance
The most accurate way to evaluate your future performance is to understand how the company has performed in the past, especially in the midst of an economic downturn. Proactive expense control, profitability and the ability of management to adapt is of particular interest to your banker. It is also important to understand how your company performed relative to industry benchmarks for companies of similar scope and size in your industry. Your banker can assist you in providing this information.
While the facts and figures will be the primary driving force in considering the credit request, your story-line is also important. Bankers will take into consideration your narrative in reviewing the financial performance and will also want to fully understand the current financial performance and your expectations during the next 12-18 months.
Financial reporting capabilities
Providing historical, current and future financial statements is only the beginning. Since the bank relies heavily on financial information, the quality of those statements is equally important.
Business owners should consider the interrelationship between the revenue size of the company, overall need for credit and type of business in selecting the appropriate quality of financial statements. While it may be appropriate for smaller companies to rely on compiled financial statements, larger companies and those with more complex credit needs will be expected to have higher-quality, audited statements. For example, audited statements provide the bank with greater assurance the company is in compliance with Generally Accepted Accounting Principles (GAAP) and that a third-party has validated internal controls. Sometimes business owners opt for lesser-quality financial statements to reduce costs and subsequently learn the specific credit request can only be accommodated with higher-quality statements. While higher-quality statements may be more expensive in the short-run, they also may enable the business owner to access higher levels of debt and better pricing.
Your ability to produce accurate and timely statements is very important to your banker and is a big consideration in the extension of credit. Your banker should be willing and able to provide you valuable assistance on the appropriate quality of financial reporting for your company. You should not only consider the present size of the business, but expectations of quality as your company grows.
The ability to provide quality, cohesive reporting on the company’s financial fundamentals will help your banker recognize the level of financial understanding you have as well as the relative financial position of your company today (handling 3 of the 5 C’s – Capacity, Capital and Collateral).
Business environment and plans
The recent turbulent economy has proven tough on businesses. Understanding your recent history, looking objectively at current conditions and making a compelling case for your future business plans are influential parts of the background a banker needs to assess your company’s credit opportunities (the 5th C – Conditions).
Business history: Tell your banker how your business began, the challenges your company has overcome and the victories it has achieved throughout its development. Be open and honest—remember, while financial performance is important, so is the story line.
Competition: Include in your narrative an overview of the competition in your market and how you have met or adjusted for those challenges. Having a strong handle on the competitive demands in your local marketplace and clear rationale as to why that drives strategic and tactical decisions by your company signifies that you are well-informed of the potential pressures and opportunities present in your business segment.
Cushions of Protection: Do you and your company have readily available resources to assist in the event of unforeseen circumstances? Such resources may include personal liquidity and equity in real estate. Access to additional capital provides the bank with greater comfort and often plays a role in the decision to extend credit.
Projections – Your banker will also want to understand your plans and outlook for the future. Combine 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. Included in this projection should be an explanation of why credit is needed and how funds will be used. Your banker will also want to know your aspirations for the company and potential exit strategies.
Integrity and reputation
All the financial information above can paint a perfect business picture, however, your banker needs to really understand, and be as comfortable with the individual they are working with at the company as with the financials. Bankers want to know who you are, what you stand for and how you will react in stressful situations (the final and most important C – Character). You can truly impress your banker by relating:
- Financial training, education and credentials
- Business experience, including your personal level of financial acumen
- Company credit history (how your company has performed in the past, issues that may have arisen and how you have dealt with them)
- Personal credit history (how you have handled your personal financial obligations)
- Vendor relationships (how your key customers and suppliers view you and your relationship)
- Commitment to retirement of the debt
Be forthcoming and transparent. Bankers don’t like surprises. It is not uncommon for borrowers to eventually breech a covenant or decision. Don’t let your banker discover these situations before you do. Preemptively chronicling unexpected events and how you intend to solve them are as important as glowing recitations. Your banker wants to know that you are able to talk openly about all situations – with the implication that those open communications will continue throughout your relationship.
Building character into your story rounds out the whole picture for your banker, and can make or break a credit-worthiness perception, as well as access to credit now and in the future.
Strengthening your banking relationship
While your banker may want 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. Typically, banks separate credit and relationship management, meaning that you usually are not dealing face to face with the decision maker. Your relationship manager will go to bat for you, of course, but asking to meet the credit specialist so that you can personally tell your story will impress the next level of management. Also, ask to meet your banker’s boss and his boss’s boss. They all work as a team and a strong impression will help your efforts. It’s a good rule of thumb that banks that do a better job of getting their credit specialists involved with clients face to face earlier on in the process can provide you better advice and possibly faster credit approval turnaround.
Of course, in this same vein, remember that relationships take time. Build your relationships over time; share your plans and your successes along the way, before you need a specific credit product. Make sure your bankers know you will come to them for advice on a wide variety of financial issues, not just to purchase services.
Also recognize that a bank is usually looking at your entire relationship, one that can extend beyond a single product or service. Think across your bank’s business lines, such as Private Wealth, Employee Benefit Services, Capital Markets, Retirement Plans, etc. Consolidating these relationships to a single bank allow products in the same family to work together, simplifying your financial operations, while amplifying the value of your relationship with the bank. That leaves you in a stronger position with your bank to receive more attention, top-notch service and the best terms. Building on your relationship in this manner will keep your bankers interested and supportive when you need financial assistance.
The credit request
Expressing your financial insight, company history, overall character and views of the future – warts and all – is truly a banker’s dream. In order to make a knowledgeable, and financially sound, decision about extending credit, a banker must understand everything they can about you and your business. Put yourself in their shoes: Would you lend money to someone whom you did not know or fully understand their motivations or use for the funds? A thoughtful, knowledgeable, even provocatively, conveyed business story will separate you from the competition when it comes to obtaining credit.
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.