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Business Borrowing 101 ... from your banker's point of view - Part 4: The Recommendation

by Mr. Mike Sanders

 

Part 1 | Part 2 | Part 3 | Part 4

This article is a 4-part series. Click PART THREE to go back and read prior part.

 

John replied, "You will need to give the banker the financial data he requested on the company, the borrowers and the proposed transaction. The bank will want to lend a portion of the cost of the equipment, say 75% of the purchase price.

"You will need to pay down 25% of the cost. This will give the bank a margin of safety in their collateral which is the equipment. If you have sufficient other equipment in the company, you might be able to use your existing equipment as collateral in lieu of the down payment. The bank might also consider using some of the equity in the company's building instead of a cash down payment. You should amortize the loan payments over a conservative life expectancy for the equipment. The bank will probably have guidelines in their operating policies as to how long the loan can be.

Last, you will need to weigh the pros and cons of fixed versus variable rate of interest if the banker is open to either option. See if establishing new business or personal accounts with the bank will ‘sweeten the deal' in your favor. Offer to have your credit card merchant account run through the bank. See if there are opportunities for you to refer other business to the bank. All of these will make you a more valuable customer to the bank.

Other Considerations

"Even though we have been focusing on your equipment borrowing needs, I believe that you might need a second loan to implement your company's new plan. The addition of three new employees and your projected higher sales volume will put a strain on your cash flow. You will probably need additional working capital to pay the new staff and purchase more raw materials for the increased production. You could have shortfalls in your cash position until the sales are completed and you have collected your accounts receivables. I would recommend that you also request a working capital line of credit from the bank to bridge any short term cash needs.

"You should prepare a projection of your costs and revenues, factoring in your cash position during that projection period. This information will show you the maximum amount you will need to have available from the line of credit. When you run short, borrow from the line. When your collections are good, you pay the line down. This is kind of like a credit card that you use throughout the month and then pay off at the end of the month. The banker will probably help you establish this line using your business assets of inventory and accounts receivable as collateral for this line of credit. Lines of credit like this work in tandem with the normal business cycle of production of inventory, sale of product, collection of receivables and then more production. The rate and term of this type of loan follow the same pattern as outlined above.

"I hope this information has helped you understand that viewing the loan transaction from both the borrower's and lender's perspective will lead to a win/win situation. Both of your needs can be met and a true relationship can be established and nurtured.

The Relationship

"One final thought, if all you need from a bank is a place to have a simple checking account, any convenient location will do. But, for a business man such as yourself who will need a variety of financial products and services over a long period of time, you should invest the time and effort into establishing a banking relationship you can keep. You should even evaluate the benefits of staying with that banker if they change banks. All banks offer similar products, but a banker that understand, trusts and supports your needs is a valuable asset to your business future."

Part 1 | Part 2 | Part 3 | Part 4

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About the author

Mr. Mike Sanders

Mr. Mike Sanders (USA)

Mr. Mike Sanders holds a BBA in Finance and an MBA. He is a licensed real estate broker and a 35+ year career banker.

 

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