Cash Flow Is Still King, but There Are Some Princes Out There
The recession provided some good cover for recent poor performance. Many businesses have turned the corner and are good lending risks, even with a poor 2008 or 2009. Here is what else your lender may be considering to decide if your business is a good risk now.
Bring "the works" to get the loan. If you are a small- or mid-sized business headed to your local banker to get a loan, be prepared to bring in the works. That includes a complete application, tax returns for you and your company for the last two or three years, and for a larger loan, a completed loan proposal.
Cash flow is king. Lenders are going to calculate their projection for recurring cash flow based on those tax returns from 2007, 2008, and 2009. Oh, that's right. Those are the depths of the recession years. And if 2007 was okay but it went downhill, even temporarily, from there, you may have a challenge qualifying for a loan.
So I was interested to start hearing business bankers speak up and mention some other factors besides the most recent history to make the best possible guess as to if you'll pay the loan.
Three other factors:
- Character: This has always been a factor, even with stellar cash flow. But it has not been sufficient without adequate cash flow. Now a lender may be more willing to fall back on it if they think the company has turned the corner but the historical numbers still have some in-your-past challenges.
- New contracts and projected revenues: If you have landed some contracts with some solid companies, the banker is likely to take that into consideration.
- Comparisons by quarter instead of year: Taking into account seasonality, the lender may be willing to predict continued improvement if each of the most recent quarters are showing it. They may want CPA prepared financial statements, though.
Meet with your lender. Do not assume that poor performance in the last several years will knock your chances for a loan out of the park. Meet with your lender and find out what else they are considering these days. You'll never have better cover for recent poor performance than this recession but be ready to show them why you think the worst is over.
