Funding Fit: How 2 Be Bankable
When entrepreneurs are looking to fund their startup, generally they first think of raising money from investors. But, according to the Kauffman Foundation, “about 40% of initial startup capital in a newly founded business is debt that originates from banks.” Lindsay Blakey, Vice President, Business Development Sales Manager, and Michael DiCiaccio, Vice President, Business Banking Sales Manager, both of Citizens Bank, shared their insights with us in How 2 Be Bankable in 2019.
So, what do banks look for when they are lending?
How will you pay back the loan? When will you pay back the loan?
In determining how and when you will pay back the loan, banks will look at both the qualitative and quantitative aspects of your business. To name just a few considerations, banks will evaluate your financials, cash flow, and credit line. It will also evaluate your management team, financial and operational management of the business, succession planning, and industry trends.
An often overlooked contributing factor is your banking relationship. Lindsay and Michael encourage entrepreneurs to build a banking relationship early on, well before you ever ask for a loan. Be sure to keep your banker apprised of your financials and your progress.
Why do you need the money?
First, banks will assess the borrowing cause and ask why there is not sufficient cash in your business to fulfill your need. Acceptable reasons to borrow money include rapid growth, seasonality, A/R cycle, purchase of inventory, and expansion. Unacceptable reasons include declining revenues, excessive distributions, negative retained earnings, and poor turnover. Second, they will consider whether they can loan for your requested purpose. Finally, they will look at your industry. Industries that are low risk with known revenue models and strong reputations are preferred.
What is your collateral?
There are numerous types of assets that can act as collateral. Short term assets can include accounts receivable and inventory and long term assets can include vehicles, machinery and equipment, and buildings. Sufficient collateral is considered to be a 1:1 ratio for business assets. Ultimately, banks are looking for strong collateral, alongside low risk.
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