BLOG: Importance of Being "Bankable"

One of the frustrating things about being a banker is not being able to approve a loan for a customer because they have adopted a strategy that minimizes their taxes without considering the affect on their borrowing power.

Borrowing power is important to the long term financial health of any business.  Why; because it is the second most important source of new capital for small businesses. The three top sources of new capital for small businesses are owner’s equity (33%), bank loans (20%), and trade credit (15%), according to Professor Ken Carow of Indiana University.

If your company is growing, you need working capital to fuel that growth. To be “bankable” you need to show strong net income and net operating income (EBITDA) over several years. The bank needs to see that your company has the ability to service the debt.

While banks appreciate a company’s future plans evidenced by budgets and business plans, lending decisions are made by reviewing financial history (tax returns and financial statements). Generally, banks will look at three years of history for larger loans. 

Working with an accountant is important in balancing tax considerations with bankability. The accountant can help with explaining the differences between the tax returns and the financial statements. 

Further, the accountant should prepare compiled or reviewed financial statements each year, to further enhance bankability. Just submitting QuickBooks reports will cause the bank to focus on tax returns which usually do not show as favorable a picture.

Building a relationship with the right banker is another key to bankability. Look into the lending policies of the bank before making a deposit commitment. Show the banker financial statements and share your plans. Ask how the bank can help you. You may be surprised at all the tools the bank can offer you.

 Once the relationship is established, meet regularly with the banker. Keeping up to date is important.

 When the time comes for a line of credit or term loan, your banker will assist you in selecting the right loan to meet your needs. Many companies wind up with the wrong type of financing; such as funding growth with a short-term line of credit that must be paid off each year, instead of a multi-year term loan. 

A growing business needs an attorney, an accountant, an insurance broker, and, of course, a banker on its team. Improving the company’s bankability can contribute greatly to its long-term financial health.