Don’t Lose Your Credit: A Cautionary Tale

The contractor on the other end of the phone was desperate for help. He had been in business for 20 years and never lost money. However, last year his company showed a slight loss, and within days of reporting his financials to the bank, he lost the very means that the company relied upon to stay in business: their line of credit. Now this contractor would not be able to fulfill a signed contract with a municipality for a $10 million project that was planned to start in a few days, and the company’s future hinged upon this one project.

He had called me because he wanted me to say a few magic words and fix everything. Unfortunately, in a situation like this, words cannot help. Instead it takes work, change management and a fair amount of time. Smart owners do not wait passively for this day to come. They take charge of their finances by meeting frequently with their accountants and accounting staff.

This contractor’s predicament is not a unique one. Indeed, many report that keeping a line of credit seems to get harder all the time. Banks want more reports now than ever before, and they want them with greater frequency, but the situation is far from hopeless. The better prepared you are when it’s time to speak with your banker, the more likely you are to retain and increase your credit.

At your next banker’s meeting, use the following strategies to maintain your line of credit:

1. Practice honesty and transparency. At the same time, maintain a healthy dose of prudence. Yes, answer the bank’s questions, but do not call your banker when you’ve had a bad day and say, “We just lost our biggest customer!” This will not enhance your reputation as a successful businessman.

2. Organize everything. This includes not only your yard and heavy equipment but your office, staff, sales processes, inventory, work processing and financials. No banker wants to see a disheveled mess on your desk or the controller’s desk. Bankers need reassurance that your books are in order, your staff is competent, your inventory is reasonable in light of your sales, your days sales outstanding are low, your current assets are several times that of your current liabilities, you have positive EBITDA (earnings before interest, taxes, depreciation and amortization) and, most importantly, you have internal controls.
 
3. Be proactive. Spend your money wisely in times of declining sales. Hire salesmen and increase advertising to help restore profitability. Also, hire a CFO or controller that is a strategic thinker focused on making profits rather than a CPA who may simply count it as it goes out the door.
 
4. Communicate with your banker. Leaving your banker out of the loop until the day of the big meeting is not wise.

5. Keep detailed records. Maintain spreadsheets of sales projections, pro forma statements, projected cash flow, savings recently enacted, equipment net equity positions (as opposed to net book value) and any unique selling proposition. And for the day of your meeting, put together a three-ring binder of the above documents with your past 12 months of financial results in an organized and professional fashion. Hand it to your bankers, and watch their reactions.