All of my current banking & finance consultant clients were initially consulting prospects. They were brave souls who attempted to navigate the murky waters of the commercial banking industry on their own and out of frustration and bewilderment hired me. They failed in their attempt to find the right business loan for their company. In my discussions with these clients I was told that when they contacted banks many of the bankers told them they were “not bankable.”
In our strategic meetings not surprisingly they ask me, “Gene, what does not being bankable mean? Is it possible I can become bankable over time?” That is the purpose of this article to define “bankability,” if you will.
My definition is not the industry standard, many banks/bankers have a different view, but I think my definition is reasonably close (my loan win percentage is 100%). My definition pertains to established business only (minimum 3 years of operating history), not startups. Startups are problematic for all lenders not just bankers.
Being bankable is a composite of both analytical (ratios) and subjective issues and is inextricably tied to a commercial bank’s loan policy and the attitudes and risk appetites of the bank credit administrators, (i.e. the dudes and dudettes who approve the loans).
The following are factors that may cause your company to be viewed as “not being bankable.”
- Industry trends that reveal either flat or declining sales.
- Company historical operating results that reveal negative trends. Sales or profits decreasing or worse case, a big loss that occurred in last 2-3 years (explainable or not).
- Lack of management depth in the executive team or a CEO that is lacking the requisite skills necessary to be an effective CEO.
- A weak business model where there is no clear unique selling or value proposition.
- A balance sheet that is highly leveraged and ill liquid (leverage measured by a debt to worth ratio greater than 4 to 1 and liquidity measured by a current ratio less than 1 to 1).
- An income statement that shows net margin % of less than 2.00% frequently.
- Historical annual debt service coverages of less than 1.10 to 1 (EBITDA/ loan principal & interest).
- Excessive salaries or distributions taken by the majority owner of the company.
- Lack of satisfactory business collateral ranked in order of desirability; real estate, accounts receivable, equipment, inventory.
- Poor personal credit of the majority owner (FICO score south of 650).
- An owner that is not liquid or lacks personal assets for collateral.
- Poor internal and external financial statements (internal accountants/bookkeeper and outside CPAs). Tax returns are not the same as accrual financials prepared in accordance with generally accepted accounting principles). THIS A HUGE FACTOR! Get ‘er done!!
Here is the good news; all of these negative issues are fixable! So there you go. Set your plan to get more bankable and obtain the loans your company needs.