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Sound Advice

Brian Milliken, SVP – Senior Commercial Banker

The relationship developed between a commercial banker and a business owner is a key component to the success of a business. Whether you’re a new business applying for a loan or a seasoned company, access to capital is extremely important. No two businesses are alike; therefore, loan structures can be customized for each unique scenario. The following is brief, sound advice to improve your business and partnership with your bank.

Applying for a loan:

When applying for a new loan, you will want to be prepared to provide a lot of financial information for the bank’s underwriting approval process. In all loan request situations, the financial information banks will require include three years of personal and business tax returns, personal financial statements, 2-3 years of financial projections, and an accurate internal year-to-date financial record. If you are a start-up company, be prepared to provide a detailed business plan. The more detail the better. When it comes to projections, unless you are an established business with trackable trends, take your projections and slash your revenue by 30% – 50%. This will give you a more realistic look at the upcoming year. Exceeding projections should be achieved every year. Don’t be over optimistic, be realistic. Numbers are a measuring stick that tells you how good you have implemented the right strategies for your business.  If a company’s performance is not meeting projections, a strategic shift needs to be immediately executed to ensure you accomplish this. 

Providing timely financial information to your banker is crucial. Loan decisions are far too often delayed because all of the information needed for underwriting hasn’t been received.     

Account Receivable Collections: 

Make sure you are getting paid in a timely manner because as the saying goes, cash is king. There are companies that take advantage of small businesses and stretch receivable payments to 90 – 120 days. This is a case of companies acting as the bank for their customers. In turn, they borrow additional funds on their line of credit to meet their own cash flow needs. This decreases profit margins on services already completed.  There is no good reason for a business to stretch payments this far out from invoice date and is considered bad practice in the business world. If you are a contractor, you should be negotiating progress payments, down payments and ensuring that receivables don’t get stretched to the point they stress cashflow.  


Pay attention to the leverage of your balance sheet. Carrying too much debt on your business can be detrimental. Businesses need to have a full understanding of their monthly obligations and being able to service the debt ongoing when business is good and bad. When considering purchasing equipment or real estate, businesses need to think about the profitability of the purchase. Is it a want or a need? How often will equipment be used vs. sitting around? Make sure an asset purchased pays for itself, otherwise renting or leasing may be a better option.    


Navigating through the current economic conditions. Many challenges exist in the current business environment. Three notable ones are a rising interest rate environment, fuel prices and supply chain interruptions. As these challenges are not going away anytime soon, it is extremely important that businesses understand their financial situation in real time. All businesses should complete accurate monthly financial statements. Understanding your cash flow, profit margins, costs and ensuring a steady revenue stream are extremely important. Not being able to react to disruption to your business model can be vital to survival of a company. Too often companies don’t have a full grasp on their current financial condition. If the financial aspect of your business is not your strong point, hire a controller, bookkeeper or CFO who can help so you are able to fully focus on your strengths. There are also local consultants who assist businesses on a part-time basis. Additionally, there are many resources available for free. Wisconsin Small Business Development Center at UW-Superior is a good example of a strategic partner for Northern Wisconsin.     


Make sure your revenue growth does not outpace your cash flow. Growth is a key factor to success but can put a company out of business if they try to grow too fast. The most important number on your balance sheet is the one that pays the bills; net income.   


Debt Service Coverage Ratio (DSCR) is the most common covenant banks will look at when determining the strength of a business during underwriting a loan for approval. The ratio measures a business’s ability to repay a debt. Banks will use historical year-end and year-to-date data from taxes, accountant statements & internal financial statements to determine this. Projections are also analyzed to measure repayment of future obligations. The basic calculation of this ratio is: (net profit + loan interest + depreciation + amortization) / monthly debt payments. Typically, banks would like to see this ratio at 1.25x. 

The best advocate to seeing that you are approved for a loan or maintaining a strong relationship with a bank is you. Know your strengths and weaknesses and wrap your business around positive sources of influence who will help you achieve success.  

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