Middle market businesses continue to have a positive outlook with an eye towards expansion. Businesses cite year-over-year sales growth as the top driver of business strength and place revenue growth as their primary goal looking forward. Forty-nine percent seek expansion through organic growth, and twenty-six percent look to use acquisitions as part of their revenue growth strategy.
Expansion often requires capital, and twenty-four percent of businesses expect that capital to come from bank financing while eighteen percent will look to private equity. Taking stock of capital needs and positioning to access capital can help businesses convert their positive outlook into realized business growth.
Investment for growth
Three investment areas stand out in today’s business environment:
Capital expenditures - A growing economy presents organic growth opportunities for companies with a well-honed operating model and a proven ability to generate attractive returns on capital. Manufacturers, distributors and wholesalers could 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. Interest rates remain well below historical norms, enabling many companies to plan investments to service anticipated demand.
Domestic business expansion – Increasing orders can generate the need for additional inventory. Working capital may be required to fund that inventory until customer payments complete the cash conversion cycle. Working capital lines of credit secured by receivables and inventory typically meet this need. A credit facility that considers your sales and cash conversion cycles can be used to fund growth.
International business growth – Expansion opportunities outside of the United States continue in a globalizing world. Whether you are selling or sourcing globally, emerging markets can create special financing needs including foreign exchange, global trade, Exim Bank financing and international wire transfers. These international business needs require special expertise and financing capabilities.
Positioning to access credit
Bankers want to understand your company from the ground up, including positive and negative trends and threats. You need a solid narrative around your business story that incorporates your team’s business background and experience.
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 expectations as to your ability to address the following:
- Quality of financial statements. High-quality financial statements are expected as your company adds debt. 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 – Bankers will expect you to have a solid understanding of fixed and variable overhead along with all major categories of expenses including operating costs, sales and marketing needed to generate each dollar of revenue, and fixed and variable overhead.
- Leverage and debt service – Zeroing in on cash flow coverage for your obligations, historically, currently and with your increased debt levels will demonstrate a grasp of your company’s debt capacity. Be prepared to discuss whether future profits will be withdrawn or retained in the business.
- Receivables and inventory– Receivables quality including details on the financial strength of your customers and bad debt experience will be evaluated during the financing process. All working capital elements will be of interest, including the terms you extend to your customers, your inventory turn rate, and your allowance for inventory waste and loss. Strong financial management systems like inventory management or account receivable will provide your banker with greater comfort from the quality of your receivables and your ability to rapidly translate receivables and inventory to cash.
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 plans for the funds you are requesting are a vital element in procuring the credit you need.
Transparency and credit history
Your business track record is interest to any creditor. Perfection is not necessary; however, your banker wants to be informed about previous rough patches and how you dealt with other banks. Remember that your banker has access to third-party personal and business credit reports. It’s important to avoid surprises. 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 expectation that those open communications will continue throughout your relationship. Your banker wants to see your commitment to repay debt in all circumstances.
Your vision for the future of your business is more important than ever. Aligning business plans and financing needs means knowing whether funds will be used to reduce risk and short up finances or to fuel major expansion. Understanding your recent history, looking objectively at current conditions and making a compelling case for future business plans help a banker assess your credit request.
Don’t think you need to create a 25-page business plan to express 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, your market, input costs or your operations.
- A narrative on the competition and your assessment of future moves along with your potential responses.
- Company owner/principal personal aspirations and long (or short) term exit strategy, including plans to grow, acquire other businesses, sell the existing business or turn it over to heirs.
- Back-up plans. Gaming an approach to unforeseen circumstances such as the loss of a major contract or entrance of a new competitor demonstrates the business maturity that bankers crave.
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 understand your banker and his or her role at the 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.
Try to use your bank’s team. Go to them for advice and expert assistance. And, recognize that a bank is usually looking at your entire relationship, one that can extend beyond a single product or service.
SunTrust Research with 255 businesses (annual revenue between $2 million and $9.99 million) conducted in Q1 2017.