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Answer from our Guest Expert Peter Hupalo of Hupalo Ltd.
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Stay on Mr. Potter's "Good" Side
With this said, preserve the relationship with your banker. Asking if he's "ever had an original thought for that matter?" is probably not the best question to ask him. (Though it's okay to ask us!) Instead, ask your "Mr. Potter" what you can do to improve your chances of getting the loan next year. You already alluded to your current debt position. If it's seasonal, pay it down and show a stronger financial statement next time. Sure, next season, you'll run up the line of credit again, but don't worry about that. That's a different kind of borrowing! Contemplate what time of year is the best for you to seek a loan.
The banker also mentioned your tax return loss and a fear that you might not have the cash flow to pay down the new loan. Here's a clear indication of what's bothering your Mr. Potter. He's expressing his concerns, so get in his good graces by listening well to what he's saying. You can address these dollar dilemmas next time around. Always listen to what you're being told directly or indirectly by those you do business with since it allows you to better understand their concerns. Sometimes, just addressing those concerns will get what you want the second time around.
What Banks Crave
Remember, character is one ingredient banks use when making lending decisions. So, don't say with a wink, "I want to show a loss to the IRS, but I'm really doing quite well. I'm actually making money. Trust me." That usually doesn't go over too well. In the absence of audited financial statements, tax returns are the main stay for evaluating your business' financial strength.
For example, bankers are taught from birth about the Interest Coverage Ratio or Times Interest Earned Ratio. That's the ratio of earnings before interest and taxes (EBIT) divided by interest expense. It's a good measure of how far earnings can fall before a company will have trouble paying interest on its debt. If you're running at a loss, it will throw up a red flag -- that is, the possibility of you not being able to repay the loan or even cover the interest payments. Also, figure how this ratio looks with all your available credit lines maxed out. And some banks go beyond this, and do far more advanced survivability analyses, where a computer runs scenarios to see if your business can survive. Mr. Potter has become more automated and even less personal. Other banks will rely more upon the personal judgment of their loan officers.
Banks like stability and a record of growing profits. They like strong, positive cash flow. They don't really like repossessing things to get their money back. The your accountant's job is to help you accurately report how your business is doing (and help you save tax dollars in the process!).
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