This article originally appeared in the March 2013 issue of Smart Business Philadelphia magazine.
External financing is typically the lifeline of a company, enabling it access to capital to purchase property and equipment, hire employees, and ultimately expand the business.
Commercial lending institutions provide the most common source of such financing.
"In order to get the most out of your lender relationship, the business owner or manager needs to understand what’s important to the commercial banker," says Mark G. Metzler, CPA, director of Audit & Accounting at Kreischer Miller.
Smart Business spoke with Metzler about establishing a relationship with a commercial lender that will benefit your business.
What does a commercial lender look for in a banking relationship?
First and foremost, like most companies, the commercial lender is in business to generate a profit. Consequently, it’s imperative that the lender has confidence in the borrower’s ability to repay its loan. Therefore, in addition to evaluating the integrity of management, the commercial lender will look for a strong balance sheet and positive cash flow as indicators of the company’s ability to repay its obligations.
What else is important to the lender?
Lenders look at the experience and strength of management. In particular, they evaluate management’s ability to guide the company and execute its strategy. How has management been able to navigate through the recent turbulent economic environment? What are the backgrounds of the CFO and senior management? The lender will look at the company’s other business advisers, including its outside CPAs and attorneys, to help assess the company’s credentials. Does management surround itself with the right professionals? Lastly, the lender is interested in timely, open communication with management, sharing both good and bad news. The lender understands that projections and forecasts may change, but they don’t want to be surprised. The lender wants to know: What is management’s business plan, how has it historically performed and what are the key assumptions in the plan?
What should the business owner look for?
There are many options available to companies, and the business owner needs to evaluate a number of factors. First, who will be the company’s relationship manager and what is his or her experience? Remember, the relationship manager will be the one who presents the company’s case for extending the loan to the bank’s credit committee and monitors the company’s performance. The relationship manager plays a critical part and he or she should understand your business, its opportunities and threats, and potential capital requirements. Second, what type of financing is most appropriate? Options include traditional term debt, lines of credit, asset-based arrangements and SBA loans, among others. The size of the requested credit facility may help dictate the type of loan and banks that are suitable. Third, are there other services that you may need from the bank? For instance, if you have a global business, the bank’s foreign exchange capabilities may be important. Another business may be interested in cash management. Finally, because the company is often the business owner’s greatest asset, what private banking services are available to the owner individually?
What role do interest rates play?
Terms and conditions are always important, but we’ve found that commercial banks will be competitive for the right credit. Depending on the size and type of loan, the lender may be interested in collateral or personal guarantees. Obviously, companies with the strongest balance sheets and cash flows will generally obtain the best terms. While the lowest interest rate may appear to be most desirable, the experience of the relationship manager, the depth of service offerings and the commitment of the bank to your business are intangible factors that should not be ignored.
Do you have any recommendations?
Because your CPA works with a number of companies and has access to credit arrangements offered by various lending institutions, he or she is ideally positioned to guide you through the process and assist you in negotiating an optimal lending relationship for your company.●