A glimmer of hope on the economic horizon tilts us toward slight optimism about 2014. After a long stretch of downsizing, expense control, and nominal capital expenditures, growth has become a word more often mentioned again — albeit in whispered tones.
As companies consider sources for funding this potential growth and bankers gear up to lend money again, it seems an appropriate time to review some fundamentals still important in this relationship.
In this changing business environment, the most common question business owners ask their banker: “What are you looking for from me and my business if I need to borrow?”
Here are some answers that might help Clark County businesses get the financing they need this year.
Management/ownership team. How have you managed your business during this economically challenging period? Are you transparent and upfront with your lender? No one likes surprises, and this holds particularly true for bankers. Communicating and planning ahead go a long way in developing a meaningful relationship.
Business planning. Do you know your business and capital limitations? “Stress test” your business and have a Plan B. Develop a business plan, and update it. Hope is not a plan. There will always be problems and challenges; the key is how you respond. Lenders will also want to know if you have “skin in the game.” How much debt can your company handle? Will you be able to honor the obligation and repay the debt? There are numerous financial benchmarks, such as debt and liquidity ratios, that banks use before advancing funds.
Market knowledge. How well do you understand your business’s competitive landscape? Become familiar with market cycles and what drivers are key to your industry. Are there barriers to entry that exist — or that you can create — for a segment of your business line? Measure your own business metrics vs. those of your competition. Good competition can be a win-win; however, we’ve all experienced market swings bringing in new players to the market that can create havoc with returns. Sometimes it’s OK to sit on the sidelines.
Professional engagement. Are you engaged so that you understand the economic, political and community landscape (i.e. through CREDC/Chamber of Commerce, etc.)? For example, regulatory overload is overshadowing many concerns of the banking industry. This challenge, coupled with thin margins and tepid loan demand, is leading to a shrinking pool of financial institutions from which to choose. Educate yourself so you understand the challenges of your key partners so you can bracket your reliance on them; i.e., how would a spike in materials cost impact your business?
Understanding financing. Do you understand the financing fundamentals of loan repayments so you can position yourself for a successful financing arrangement? While cash flow will nearly always be the primary source of repayment of a loan, lenders look at what they call a secondary source of repayment. Collateral represents assets that the company pledges as an alternate repayment source for the loan.
Lisa Dow is senior vice president for credit administration for Tacoma-based Columbia Bank. She worked 11 years in commercial and corporate banking with Security Pacific Bank and Bank of America in San Francisco, followed by 20 years in Vancouver with Bank of Vancouver/West Coast Bank/Columbia Bank.