Get inside the mind of the person on the other side of the desk.
Careful consideration should be given to choosing a local bank as most landscape businesses are local and a local bank usually makes an extra effort to deal with local businesses. Many times when dealing with a local bank you will deal with senior management who will listen to your needs and fight to get the services you need. This is not to say that large banks cannot meet your needs, rather it is to say that it will be difficult for a small customer to deal with the real decision makers.
This article will focus on those who are looking for credit. More specifically, as your landscape company grows you will be looking for money to expand your business as well as purchase vehicles, equipment and perhaps inventory.
Applying for such credit can be frustrating. Remember, bankers are conservative by nature and their first priority is to protect their loan portfolio as well as earning a competitive return on their loans. As a borrower, you need to give the banker as many reasons as you can to make him feel comfortable with you. Here are some tips you should keep in mind when shopping for a bank.
What if my credit rating is low? As the quality of your credit record and personal history declines, so do your chances of getting a loan – especially if you do not have good collateral. It is important to clear up your credit history and any other outstanding legal issues to the extent that you can. With a shaky history, you may have more success borrowing from individuals than from banks.
Other options. If you cannot get a loan because of a low credit rating, you still have options. You can sell your accounts receivable to a bank or a credit collection agency for cash, or pledge firm assets for a loan from a bank. You can also pledge the personal assets of the owners of the business for a loan from a bank, or put a squeeze your accounts receivable to get more cash on hand.
Build a banking relationship. If you have good credit and you want to proceed with establishing a banking relationship, it all starts with the loan application.
Although business loan applications vary from bank to bank, they all have some basic information in common. Here are some universal questions:
- Why are you applying for capital?
- Who will be managing the business?
- What will you use the funds for?
- What assets will you purchase?
- Do you have a list of suppliers?
- What is your personal background?
Lenders will want to know your previous address and whether you have a criminal record.
Loan packages. Once you submit the application the bank will ask for a loan package. The loan package usually consists of an application detailing your company’s history as well as future plans. The following items are usually required in the loan package:
- Personal net worth statement of the owner – The bank will usually give you a template that they use to present the information. It may be a good idea to have your CPA complete this form as he/she usually knows what the bank is looking for and he/she will be able to provide complete information.
- Three years prior personal and business tax returns – Most businesses are taxed as either partnerships (including LLCs) or corporations (S Corp or C Corps) and have tax returns that are separate and distinct from the personal tax returns of their owners. The bank will require a signed copy of each year. In a few cases, a business may be taxed as a sole proprietorship or a single member LLC. In this case, the personal tax return contains the profit and loss statement of the business on Schedule C. The bank will require signed copies of these returns as well.
- Most recent profit/loss and balance sheet – If you are using QuickBooks or Peach Tree, these reports are extremely easy to produce. It would be highly advisable to have a CPA look at the interim reports prior to submission if he/she is not already preparing them on a monthly basis.
- Three-year budget – The main purpose for a budget is for the banker to determine if you are serious about your business. While the budget may or may not come to fruition, and only hindsight can determine this, all well run businesses budget for the future.
- Current A/R aging, A/P aging – These accounts receivable reports will come from your dispatch program and should be aged at 30, 60 and 90 days. The accounts payable reports will come from your QuickBooks or Peach Tree general ledger program and should be aged along the same lines.
The banker will use these documents to assess risk. One of the first things he will do is perform a ratio analysis. Some of the more important ratios include Interest coverage, profitability, return on investment. In this analysis he is determining if you are credit worthy, how much debt you can afford and what collateral is available to secure the credit. The most important concepts here would be:
- EBITDA – Most banks will require your earnings before interest, taxes, depreciation and amortization to be at least 1.25 times debt service (all payments for all debt) and will provide financing up to a monthly payment that will coincide with this payment amount.
- Equity – Equity on your balance sheet would include all assets minus all liabilities. You can think of it as if you purchased your home for $200,000 and mortgaged $125,000. Your equity would be $75,000. Equity should be positive. In most instances, since assets are recorded at purchased value rather than fair market value, an appraisal can be done on existing assets and if market value of assets minus liabilities is positive your company may in fact be healthier than what your balance sheet may depict.
Best practices. For business owners who are uninformed or unorganized, banking relationships can be tricky to manage. The bank will require you to submit periodic financial information verifying that your business ratios are within the terms of the loan or credit line agreement.
If your scores fall below the covenants described in the loan document, you can be put on a “watch list.” If this happens, the bank will not lend you any more money or allow you to draw on your credit line. In an extreme situation, the bank can – or at least has the prerogative to – call in the loan.
Conclusion. A strong banking relationship is extremely important in growing a landscape business. However, proper planning and financial management is the key to a healthy relationship. In business you are judged on your word and your ability to execute on what you say you are going to do or what you are required to do. So in order to start and maintain a strong banking relationship, make sure you can meet the terms of the agreement and treat the relationship as one of the most important factors in your success as a growing business.
Daniel S. Gordon is a CPA in New Jersey and owns an accounting firm that caters to landscape professionals throughout the U.S.