Working Capital Lines Of Credit And Loans That Work – Not Just For The Bank!
When business owners and financial managers have successfully negotiated working capital facilities or term loans it should not be the end of the story. By that we mean that the business person needs to continually focus on what the bank or other financial institution requires, and more importantly, how they view the customer from a control point of view – i.e. are they in control or able to exert control on your business .
The balance sheet must be a top focus for the business owner – once a firm is over leveraged, i.e. borrowing too heavily, the bank generally starts positioning around their overall security or your ability to de-leverage.
Borrowers must be comfortable and knowledgeable about the use of ‘triggers ‘. Triggers are the implied actions the bank or institution will take when things aren’t working out. This can include everything from general poor financial performance to very specific pre agreed upon financial ratios. And the business owner must remember that he or she agreed to and concurred with these ratios.
Banks want to see cash flow ‘ flowing ‘ – flowing to repay their debt – so there many be triggers put in place by the bank to ensure that minimum cash flow standards are kept, and also that owners and shareholders do not withdraw excess funds .
Over time business owners will probably find, in our experience, that the bank restrictions either tighten up or loosen, depending of course on the overall comfort level the bank has with the firm. Clearly firms that seem temporarily challenged in profits and balance sheet quality will receive much more scrutiny.
Business owners can do some very solid and valuable prepatory work in negotiation of bank triggers. If they have a solid long term history of earnings this should be a very strong negotiating point with the institution. Simply by self introspection of the firm can the owner or financial manager focus on what is going to go wrong re sales, pricing, forex, etc. The owner needs to be able to talk to these issues and show how he could address them.
For a start calculate your own key operating ratios, if they are going to be discussion points with your bank or institution you might as well know your numbers now. Using ‘what if ‘scenarios help immensely and will position yourself as knowledgeable about your business.
Discussions with your bank need not be absolute and immediate on any time of loan negotiation – you can get a great informal sense of what the bank is thinking and work from that point forward. Try and read between the lines as to what is hot, and what a Vis is not with the bank Vis their perception of your firm, industry, etc.
In summary, business owners need to show maximum flexibility on working capital and loan negotiations. Negotiations should be from strength, accentuating the positive. Example – strong forecasted sales and profits and potentially offset a weaker balance sheet. Trade-offs with the bank is also encouraged- and fewer triggers and covenants are better than more! And yes, there is more than one bank in the world, although business owners should be cautioned that shopping around is not optimal at all times , and can in fact backfire , particularly a small business . Business owner beware!
Questions and Answers
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