Invergarry Partners

  1. Tell the truth.  There is no reason to hide anything from your banker.  By telling them everything about you and your business, it helps your banker do her job to the best of her abilities.  If you try to do her job for her by making assumptions about what information will be helpful or harmful in her underwriting process, you may hurt your chances of optimizing your relationship.  Good news and bad news should travel at equal speed to your banker.
  2. Cash is king.  You should be able to show a history of positive cash flow that is sufficient to cover your payments of principal and interest on your terms loans by a factor of 1.25 times to 1.  The bank wants to see that you have cash cushion so that if unseen factors diminish future cash flow compared to your historical cash flow, you’ll still be able to make payments.
  3. Keep leverage low.  You should have enough equity in your business so that your debt is no more than two or three times equity.  If you are taking all of your earnings out of the business in the form of dividends or other cash payments, leverage may exceed the amount that makes your banker comfortable.  Again, she wants to see a cushion that you can fall back on if your business changes adversely.
  4. Don’t ask for more debt when you really need equity.  Business owners are wired to run their businesses on other people’s money to the greatest extent possible.  Bank debt is the cheapest and, until recently, the most available form of cash for a business.  If your banker tells you she cannot provide more debt until you raise more equity, it is a sign that your leverage is too high and/or your cash flow cannot support new debt.  Consider asking friends and family for equity injections that have repayment terms that are favorable to you and your business.
  5. Pay for professional advice.  You will distinguish yourself from other bank clients by presenting financial results that are examined and ratified by an outside firm, that are professionally presented with clear and concise narratives and footnotes and that are clearly the work of a professional.  Unless you are in the business of doing this very thing for others, use a professional.  Get into the habit early in the life of your business, and its value to outsiders who may be considering selling to you, buying from, investing in your business and buying your business will increase enormously.

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