When it comes to working with banks there is an absolute formula for success. Now, I’m not talking about your balance sheet, your profitability or your financial ratios. Those all have to be there, of course, and they have to be numbers that fall within the bank’s parameters. That’s just the price of admission. What I’m talking about are the 3 absolute things a bank needs to know to say “YES” to your business proposal:
1. Where has your business been?
2. Where is your business going?
3. How is it going to get there?
If you can fully answer these 3 questions and back them up with data, the bank will “magically” say yes to your proposal! So, how do you answer these questions?
“Where has your business been?” Most banks will want to see the 3 most recent years of your financial reports. If the amount you want to borrow is any sizable amount, say over $200K, many banks will require these financials to be “reviewed” by an accounting firm. (This is much less invasive and costly than a financial audit). A financial review is a CPA performed examination of your financial records and it reports on the plausibility of your financial statements….this gives the bank more confidence that they are accurate.
“Where is your business going?” This is where you get to tell your story. In essence, this is a business plan. You are weaving the story of how you will spend the money that the bank loans you, how that will build your business and add to your future success. Have something written down that you can leave with the bank. You might remember all the details because you’ve built the entire thing in your head….but bankers talk to a lot of people every day. They need something written down that they can share with others in the bank.
“How is it going to get there?” Financial projections. A banker wants to see that you’ve done the calculations. They want you to prove on paper that you won’t run out of cash, that you will make a profit and that you WILL generate adequate cash flow to repay them. For some funny reason that’s important to bankers!
Now a story. I work with a 400 cow dairy that is a Dad and his two sons that are recently out of high school. I’ve been telling him for 5+ years that he should consider getting his annual financial reports reviewed (his accounting firm offers this). He just didn’t feel it was worth the extra money, and amazingly, the accounting firm supported his thoughts! He’s always worked with a local bank and had a good relationship. Fast forward to this year. He wants to pour a silage pad, and spend some money on manure equipment. All this needs to be done in the next 2 weeks. The cost is around $250K. Unfortunately, that amount kicked his loan request up to
the regional office…..who is now asking for much, much more detail on his financials and loan request. Will he get the money to pour his concrete pad in time to harvest 1st cutting haylage? I hope so…….but I just wish he had followed my advice over the last 5 years. Then the bank’s request for more information would have been answered by a quick email with the previous 3 years reviewed financials attached.
What will you want to do in 3 years? The time to start getting your financial reports reviewed is TODAY!
Doc’s Ruminations
Insights from Dr. Kevin Hoogendoorn, DVM, Creator and Owner of the ZISK dairy app.
