By Chris Mennel & Natalie Hopkins In part one of our banking blog series, we offered suggestions to assist business owners in making themselves more bankable. However, becoming more bankable is just the beginning. Often, once the owners have achieved their initial goal of obtaining financing or securing a new banking relationship, they neglect to maintain that relationship. While running the business should continue to be their top priority, we believe there are several key elements necessary to maintain that positive courtship that was developed with their banker.
Understanding loan covenants may be one of the easiest ways to maintain a positive banking relationship. All banks have certain covenants they prefer. Some common ones that we see are: 1) Maintaining a certain debt service coverage ratio; 2) Maintaining a certain debt to equity ratio; or 3) Maintaining a minimum tangible net worth. We find that the covenants aren’t calculated until our annual financial statement audit, review or compilation services have been completed.
There are instances when two months past year-end, we discover that a client defaulted on its covenants. In response, the bank must then waive the violation before the annual audit, review or compilation can be issued since the company is in default on its loan. Business owners should have a clear understanding of their covenants and be evaluating them throughout the year. This eliminates surprises at year-end. In the event there is a default, the discussions go more smoothly if that dialogue has taken place throughout the year.
While banks usually indicate their compliance requirements through loan covenants, several other indicators are used to measure the overall relationship. Banking relationships are typically reviewed annually, usually when a business’ line of credit is approaching renewal. We hear bankers talk about what “credit” will scrutinize in terms of results, ratios, etc. We refer to “credit” as the man behind the curtain. There are benchmarks that analysts like to see and, unfortunately, the analysts don’t always have the first-hand knowledge of the business like the business bankers do. Understanding what could be reviewed will help ease burdens that may surface at renewal time.
Finally, keeping an open dialogue with your banker is absolutely essential. The frequency of that dialogue is dependent upon the nature of your business and overall structure of your relationship. At a minimum, talk with your banker at least once per quarter. It allows business owners to share first-hand knowledge of how the year is going and what may be coming down the pipeline, etc. Depending on your business, there may be equipment purchases that you are considering or additional lines of credit needed to finance growth. Allowing the banker ample time to assess that will usually lead to a more advantageous result.
If you would like more information on your overall financing needs and how that area of your business could be improved, please contact Chris Mennel, 317-569-4181, ext. 260 or firstname.lastname@example.org. Alerding CPA Group is an Indianapolis-based public accounting firm.
This post was written by:
Christopher Mennel, CPA
Senior Audit Manager
Chris oversees audit and accounting services, not-for-profit and consulting services. Chris’ specialties include manufacturing, distribution/wholesale, retail, health and welfare, service and civic organizations. Chris also prepares financial statement projections and other financial analyses.
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