Securing dependable credit is a top priority for many business owners. A large measure of success rests on making a convincing argument for credit for your business.
It’s also helpful to look at the request from the perspective of a banker. What might a lender be looking for while evaluating your request? A strong balance sheet? Collateral? Profitability? Cash flow? These are all crucial aspects to consider when building a case to secure credit, but it’s also important to highlight your intangible assets. Talk about your passion, your purpose, and your company’s ability to turn obstacles into opportunities. The more compelling your story is, the higher your chances are for approval.
Your company’s credit history is important to lenders, but your story should illustrate the bigger picture, especially your commitment to meeting financial obligations, like debt repayment.
Learn the 5 C’s of credit.
Start by brushing up on the credit basics.
1. Character – Integrity of the owner, demonstrated by a determination to honor financial obligations
2. Capacity - The company’s ability to expand operations by highlighting its strength and adequate resources
3. Capital – Funds necessary to operate the business and generate cash flow in a competitive business environment
4. Collateral – Assets that can be committed to loan repayment to protect the lender’s interests
5. Conditions – Economic factors that affect the company’s financial state and performance
Lenders are familiar with these guiding principles and will consider them while evaluating your request. What type of credit are you looking for? A working capital line of credit? A commercial mortgage? Maybe a more sophisticated type like an Employee Stock Ownership Plan (ESOP) or a dividend recapitalization loan?
Whatever credit your company might seek, framing your story around the “5 C’s” can help your business secure a loan.
Identify key elements of your business story.
Before approving your loan request, your banker will need to evaluate your financial status. A review includes an assessment of your financial statements and tax returns, growth projections, and accounts receivable reports.
Beyond financial measures, it’s just as important to show your financial acumen and articulate how your business plan will lead to success. Your narrative could include:
- Your education, technical background, and business expertise
- Your management team and succession plans
- Financial, accounting, and operating systems
- External resources like financial consultants and your CPA
- Economic and industry pressures affecting your business
- Potential opportunities and risks for the next 12-18 months
- Your experience handling business adversity
- Your communication style and transparency
- Commitment to the success of the company and to repaying financial obligations
Put your story into words.
As you start drafting, put yourself in your banker’s shoes and address four topics:
Past, current, and future financial performance
The best way to predict how your company will perform in the future is to outline how it fared in the past, especially in the face of adversity. Outline your company’s proactive expense control, profitability, and ability to adapt, as these qualities will be particularly interesting to your lender.
Where does your company stand today? What does the future hold for your business? How did your business perform compared to similar companies? Back up your reasoning with facts and figures, and always emphasize your drive to take your business to the next level.
Financial reporting capabilities
When lenders look at financial reporting, they evaluate the quality and regularity of your financial statements. Your company’s size, industry, and annual revenue should determine how detailed your financial records are and whether they are compiled by you, an accountant, or an outside firm.
Larger companies with more complex credit needs require high-quality financial statements and affirmations from independent auditors validating internal controls and confirming that the company follows Generally Accepted Accounting Principles (GAAP). Credit requests from smaller businesses may have lower expectations but still must be accompanied by high-quality statements. Your banker can guide you on the appropriate level of financial reporting.
Business acumen and planning
Lenders want to know how well you understand your business, your market, and the impact of economic shifts and sudden challenges. Your narrative should tell your lender:
Business history – Describe how your business began. What obstacles have you overcome? Discuss how your success has been achieved through hard work.
Competition – Provide an overview of the competition in your market or industry. How have you adapted to stay competitive? How has the competition shaped your strategic decisions? Show you are well-versed on the business risks and opportunities.
Cushions of protection – What resources can you tap in the event of a business crisis or downturn? Access to additional capital makes the decision to extend credit easier, so be sure to mention real estate equity or personal assets.
Projections – Your lender wants to understand your company’s future. How will your business react to shifts in the economy? How will your company adapt to meet evolving consumer needs? How will your business adjust to changes in distribution channels?
An overview of the past 12 months along with projections for the next 12–18 months should provide some answers. Clearly explain why credit is needed, how the funds will be used, and how they will generate enough cash flow to meet the terms of your loan. Mention potential exit strategies if they’re the likely source for loan repayment.
Integrity and reputation
Lenders need to have confidence in you and your business before approving a loan. Bankers want to know who you are and what you stand for. They want to know how you will react to stressful situations. You can make a strong impression on your lender with:
- Your financial training, education, and credentials
- Business experience, including your own financial acumen
- Company credit history – how your company has performed in the past, issues that may have come up, and how you dealt with them
- Personal credit history – how you have handled your personal financial obligations
- Vendor relationships – how your key customers and suppliers view you and your company
- Your debt repayment track record
If you’ve hit a few career bumps, tell your banker up front so there are no surprises later. Make it clear that open and honest communication will be the foundation of your business relationship and that you would prefer to talk through all issues. Demonstrating character can enhance how you’re perceived by your lender, build trust, and improve your changes for credit approval.
Strengthen your banking relationship.
While your banker needs to be able to understand who you are and how you run your business, professional relationships extend both ways. Meeting people via Zoom or face to face can establish relationships quickly. Ask to meet the credit specialist and anyone else on the team that might be interested in your story. Share your story and your triumphs along the way.
In turn, your bank will evaluate your entire financial relationship. Think about how you could benefit from your bank’s other capabilities, like wealth management, employee benefit services, capital markets, and retirement plans.
Consolidating these relationships within a single bank can simplify your financial operations, while amplifying the value of your relationship with the bank.