If your company is experiencing rapid growth, you might find yourself navigating a good news/bad news situation: while your sales figures climb, managing cash flow becomes increasingly complex, pushing you to seek additional financing to meet the rising demand. Consider this scenario: A well-known retailer expresses interest in your products, presenting an exciting opportunity that could significantly elevate your business.

However, they have a requirement: they want a substantial discount for bulk orders upfront.

Now, you’re caught in a challenging position. Declining could mean missing out on a lucrative partnership, yet agreeing could strain your cash reserves. You’re not alone in this struggle; many businesses face similar hurdles when scaling operations or entering new partnerships, especially when balancing cash flow and the cost of fulfilling larger orders.

To build a stronger case when approaching your financial institution for support, it’s essential to understand how bankers think and what they look for in terms of business viability. A solid business plan is just the beginning; you must clearly outline your financial needs and establish a robust strategy that highlights your project’s viability. Here are some practical tips to help you prepare for that crucial conversation—and improve your chances of a successful outcome.

Understanding your financial institution

Gaining a clear understanding of how financial institutions—such as national banks, regional banks, credit unions, and other lenders—operate is essential for enhancing your borrowing potential. Here are some key operating principles to consider:

The difference between being bankable and lendable

Every entity with financial records is bankable: this means you can open a business account, deposit revenues, and pay bills. However, to be deemed lendable, you generally need a minimum of three years of financial statements, along with tangible assets, inventory, or accounts receivable to serve as collateral. A minimum risk rating is also required. Understanding your company’s performance in financial terms is crucial before you approach your banker for additional funding.

How financial institutions evaluate creditworthiness

The approach that financial institutions take to assess creditworthiness is constantly changing. Evaluating a business often involves several decision-makers, so bankers may use a behavioural-based model to determine your credit score. This score typically merges performance metrics from businesses within your industry and assesses your business’s history with the current financial institution, which includes factors such as borrowing and repayment patterns, cash cycles, and customer payment terms.

Banks often don’t value foreign assets

Many banks are hesitant to assign value to assets located overseas, including any foreign accounts receivable. The reason for this caution is straightforward: if repayment issues arise, banks face challenges in recovering losses when collateral assets are internationally situated. This situation can lead to reduced financing possibilities and limit the size and number of contracts your business can manage simultaneously.

Competition for loan dollars

When you seek financing from your bank, remember that you are competing with other businesses for the same loan funds. Therefore, it’s vital that you present your case clearly and persuasively. The next section outlines the essential elements you need to include.

Time constraints of account managers

It’s likely that your account manager at the financial institution is balancing a diverse portfolio of clients, each with distinct needs and business backgrounds. To ensure a successful meeting, providing a concise business plan along with well-presented financial statements will significantly enhance your chances of a favourable outcome.

Essential documents to take to your lender

With an understanding of how banks operate, it’s time to prepare your documentation and refine your pitch.

1. Define your request

Clarifying your financial request is crucial. Take the time to outline precisely what you need from your financial institution. Whether it’s bridging the gap between supplier payments and customer receipts or funds to secure materials for a significant contract, presenting your pain points will aid your account manager in determining the appropriate financing solution—be it a loan or line of credit.

Keep in mind, loans provide a limited credit amount that must be repaid in full, while lines of credit offer revolving access, allowing for continuous borrowing within a predetermined limit.

2. Compile financial statements

Financial institutions generally favour established companies with a history of financial stability. Aim to have at least three years of financial statements ready to demonstrate your business’s viability. If your business is newer or has unusual financial trends, be prepared to share future projections that reflect your anticipated growth. For younger businesses, pursuing financing for specific transactions can enhance your credibility.

3. Evaluate your collateral

For small business lines of credit, banks typically require $2 in collateral for every $1 financed. Understand what collateral you can offer, which may include capital assets, inventory, or accounts receivable.

• Capital assets: These consist of real estate and equipment, which banks may be reluctant to accept due to their liquidation challenges.

• Inventory: Can be used at a discounted valuation, depending on its quality and turnover rate.

• Accounts Receivable: Domestic receivables with short payment terms may be accepted, while international receivables are often unsupported.

4. Perfect your pitch

With your understanding of the bank’s considerations, ensure your pitch stands out. Develop a well-prepared presentation that balances enthusiasm for your business with sound financial planning. Your banker will appreciate your passion, but they’ll also seek reassurance that you have a strategic plan in place. Be ready to discuss the reasons behind your working capital need and the unique aspects of your business that set you apart.

Additionally, if you’re aiming to enter a new market, prepare to articulate the associated risks and benefits, as well as your long-term vision for growth within that market.

5. Mitigate your bank’s risk

To improve your chances of securing working capital, demonstrate to your bank that you understand and can mitigate their risks. They will need confidence in their ability to recover funds if repayment becomes an issue. By following these guidelines, you will enhance your approach to securing financing from your financial institution, ultimately positioning your business for sustainable growth and success.

Chat with us to ensure your financial data is professionally presented and aligns with your lender’s requirements.

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