Getting Back to Bank Financing

Financing Through an Asset Based Lender Instills Discipline in Businesses

Many small businesses (primarily those with less than $30M in revenue) are understaffed or have the wrong staff in their finance departments so the timeliness and accuracy of financial information is not always the best which has an impact when they’re trying to borrow money.

Asset based lending forces discipline in lender reporting, especially on the receivables side, but it translates into other areas as well. If business owners are asked to exit a bank and want to keep the time they’re with an asset based lender to a minimum, in addition to fixing whatever problems they have, they need to understand that in order to return to a bank, banks focus on leverage and profitability. Profitability drives leverage. The more money the business makes that’s kept in the business, the lower the leverage will be.

The Importance of Financials in Returning to Bank Financing

Most business owners think they know how their business is doing without looking at a financial. Sometimes they’re right but many times they’re not because it’s hard to capture everything and keep it in mind all the time. If they put some resources into getting a strong controller and put the right systems in place, fairly early on into each new month they can look at the last month’s results and see where they’re off. They can track their gross profit, their operating expenses and see exactly where the business is. That’s important as is to project what they believe the business will do going forward. Having a projection allows business owners to see what they’re working against and what they should be able to do within some specific parameters and time frames. And when results are off, they can see if their assumptions were off or if other factors contributed. Financials are a tracking mechanism to hold people accountable.

When there’s no accountability, things can get out of hand; especially when a business is doing well because good times hide problems. In good times, the business is making money but maybe if someone was really keeping his/her eye on the ball, the business could be making even more money. And then when there’s a downturn, expenses become bloated and the business can get off track.

Companies looking to return to a bank need to have their accounting systems buckled up. Business owners need to understand and produce the financial information banks require in order to return to them.

Trust the Process

Interestingly, business owners typically don’t have good financial people in their organizations because (1) they cost more than the owner wants to spend, or (2) in some cases, the owner is intimidated by someone who knows part of the business more than they do. We’ve found over the years that business owners who recognize their own weaknesses, hire strong people to cover them and put resources in financial reporting and making sure that they have timely information will get back to banks much faster than those who don’t.