Inside the Minds of Credit Managers

Article by:
Dean Shillington

This won’t be news to entrepreneurs, but the lending world has changed. Eighteen months into a weak global economy, virtually everyone’s financial statements are causing heartburn at local financial institutions. What does this mean for your business? The job of securing debt to operate and expand your business just became much more difficult. However, hope exists.

Thankfully, there is still plenty of bank cash available. It’s just harder to get. Beyond the obvious ratios, I can tell you that there has never been a more important time to think strategically before you walk into your bank requesting a business loan. As a former credit manager with one of the major international lenders, I know from experience how invaluable it is to give your business a long, hard look early on, so that you can address what those credit people will be only too eager to point out.

Consider the following six points before approaching your bank, and you will have a decent chance of obtaining that much-sought-after cash:

  • Forecast your Finances: While your financial statements illustrate how you have done historically, one of the first things that will be asked of you is how you will do this year and next year. Forecasting used to be a “nice to have” item as a credit manager, but the shifting of power has made it a pre-requisite to getting approved. Keep it simple, and most importantly, realistic. Remember the “Three Cs”: clear, concise and conservative planning. Try not to make the mistake I see many entrepreneurs make: not knowing if you can afford the debt for the income you are forecasting.

  • Cash (FLOW) is King: Think positive working capital, ability to service your long- term debt, contingency planning for slowdowns, shareholder disputes and expensive settlements from lawsuits. These are all of the immediate thoughts going through a credit manager’s mind regarding your company. This is the single most important ratio that is addressed in the application, so you need to be prepared. The rule of thumb: make sure you can cover 1.25x (or greater) of the debt payments you need to make in the next 12 months, based on last year’s income. If not, your forecasting just became even more important.

  • Clean the Skeletons Off of the Balance Sheets: While newer accounting guidelines have limited the age-old tradition of maintaining intangible assets, many companies still have random skeletons lurking on their financial statements that scare credit departments. If you are one of those companies carrying legacy bad debts, overstated inventories or long and drawn-out contingent liabilities, do yourself a favor and write them off during this downturn. It’s much easier to explain losses in a downturn, because you can already assume that the credit managers are scrutinizing those skeletons in the most negative way. You don’t want a lender to later discover that an asset they thought was on your balance sheet really isn’t there. Being on the receiving end, it won’t end well for the entrepreneur. A cleaner balance sheet is a more trustworthy balance sheet.

  • Prepare Exit Strategies: No deal gets approved at a financial institution without that decision-maker thinking first and foremost how he or she is going to exit the file whole if things go wrong in a big way. Think fire, earthquakes, floods, locusts, apocalypse ... you name it. It’s critical that the individual reviewing your deal knows exactly what the avenues are for recovering their coveted funds. Nobody knows your business better than you do, so help creditors out by offering creative suggestions on how you can recover high values in a short period of time. While it may seem unusual to give the potential grim reaper ideas on creative and speedy ways to rid themselves of your file, your odds of getting that loan in the beginning increase exponentially if that credit department is comfortable with their exit strategy.

  • Avoid Lawsuits and Collections: This is one of those giant red flags that credit managers seek out. Collection issues, obviously, are usually an indicator of how the lender’s loan is going to be repaid. lawsuits also carry the same red flag, because the credit department believes that where there is a tendency to sue, or be sued, there is a tendency to not respect creditor relationships. That said, if you do fall into this category, it is a good idea to have some great explanations prepared detailing why you fell into that unfortunate situation to begin with. Being proactive is key.

  • Illustrate Competent Management and Sell/Control. This is the backbone of the credit write-up, and it is completely based on the interpretation of the relationship manager at your chosen lender’s office. A good trick I have found to be successful is providing your lender with a one- or two-page summary on the background of your company and management, key successes, key failures, learning experiences, milestones, projects and goals, while always being honest and sincere. These important selling features will 99 times out of 100 end up on the internal credit application verbatim.

When it comes to your banking relationship, you’re probably going to deal with a credit manager who is either far too young to have any practical business experience, or is in the twilight years of their career who won’t lose any sleep about your business not closing the deal. Like rare gems, there are exceptional relationship managers, too, but either way, these are the individuals preparing the credit write-up and representing you in front of their credit team. One can’t expect these people to put your business’s best foot forward. So, put your banker hat on, be proactive by using the above suggestions and help do their job for them.

Finally, while times may be tough, take solace in the knowledge that creditors do realize they won’t make any money without lending it. As the old English proverb goes, “money, like manure, does no good until it is spread.”

Dean is the president and founder of the Canadian-based financing and consulting firm, Knightsbridge Capital Group. Knightsbridge assists clients worldwide in seeking “best fit” financing for their businesses. E-mail Dean at [email protected].

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