What Does Your Banker See When They Look at Your Business?

Last week’s issue ended on a question about cash: has your team ever learned the business was tight by watching you, rather than by hearing it from you? Your team is not the only one reading you. Your banker is too, and they are reading from a different page.

Most owners walk into the bank with a story. The banker sits down with a set of statements. The story is about what the business is becoming. The statements are about what the business has already done, and whether it can carry a payment through a bad quarter. When the two do not line up, the banker believes the statements.

So this issue is about reading your own business the way a lender does. Not to become one, but so the two of you are looking at the same page before you sit down.

The Weekend I Learned What the Bank Was Looking At

I was a CFO when we hit a cash flow crisis. We had maxed out our line of credit again and did not have enough money to make the next week’s payroll. We were thankful to have enough deposits over the weekend to cover payroll.

Here’s what I understood after that weekend that I had not fully understood before it. A line of credit has a ceiling for a reason. It is the lender’s read of what a business can carry, and a business that keeps touching that ceiling is telling the lender something, whether the owner means to or not.

What kept us above water wasn’t heroics. It was cash flow forecasting, financial projections, and systems workflow automations. Over the years since, I have built cash forecasts for seasonal companies for one specific purpose: managing their lines of credit and the financing for equipment and inventory. The pattern is the same everywhere. The owner sees a growing business. The banker sees five numbers. Here they are, in the order I think they matter, in owner language.

The Five Numbers

1. Can you pay what is due this year with what is coming in this year?

The banker calls this liquidity, and the shorthand is the current ratio: what you own that will turn into cash within a year (cash, receivables, inventory) divided by what you owe within a year (payables, the loan payments due in the next twelve months, the line of credit). You see a busy shop and a full order book. They see whether the cash side of that fraction is bigger than the bills side. A ratio under one means you are counting on next year’s money to pay this year’s bills.

2. Does your profit cover your loan payments with room to spare?

In my experience this is the one lenders lean on hardest, and the one owners most often cannot state. Debt service coverage. Lenders define it a little differently from one to the next, but the shape is the same: the cash the business earns in a year (profit before interest, taxes, and depreciation, less what you take out as the owner) divided by every loan payment due in that year, principal and interest. You see profit on the P&L. They see whether that profit, after you have been paid, still covers the note. A coverage number near one means a slow quarter puts the payment at risk. Every lender has their own comfort level above that. Ask yours what it is.

3. Whose money is the business running on?

Leverage. Total debt divided by owner’s equity. You see a business that grew because you were willing to borrow. They see how much of the risk is theirs and how much is yours. The more of the balance sheet the bank already owns, the less they want to add. This is also the number that quietly gets worse when losses eat equity, even if you never borrow another dollar.

4. Are you keeping enough of each sale, and is that steady?

Gross margin: sales less the direct cost of delivering them, as a percentage of sales. Lenders read the number, and they read the trend line even harder. A margin that drops three quarters in a row tells a banker to ask whether the business is buying its growth.

I have lived that one. In the late eighties, at a newspaper management company, newsprint prices surged. Printing costs climbed weekly, but with a two-month close it took two months for the hit to reach an income statement we could read. We were two months late understanding the hit to gross margin, and two months late raising our own prices to cover it. We weren’t careless. We were waiting on the books. Your banker reads that margin line on every statement you send them. It is worth reading it before they do.

5. Is the profit real, or is it sitting in unpaid invoices?

Receivables, and how old they are. You see revenue. They see how many days it takes that revenue to become cash, and how much of it is past sixty or ninety days. A P&L can show a good year while the checking account shows nothing, because the profit is parked with customers who have not paid. An earlier issue on the cash gap was this exact problem. Your banker reads the aging report as a test of whether the P&L can be trusted.

Closing the Gap

Notice what is not on the list. Revenue growth is not one of the five. Your pipeline is not. Your plan for next year is not. Bankers are not paid for your upside. They are paid back, or they are not, and the five numbers above are how they estimate which.

That is the gap between your view and theirs, and it closes from your side. Three considerations:

Know the five before they ask. Not to the decimal, but well enough to say them out loud and explain the trend. An owner who can do that changes the meeting. The banker stops evaluating the statements and starts evaluating the operator.

Bring the forecast, not just the history. The statements say what happened. A 13-week cash forecast says what you expect to happen, and it shows the lender you are watching the same thing they are. In my experience it is the one document that moves a conversation from “let us review your financials” to “how much do you need.”

Tell them early. A lender who hears about a rough quarter from you, in advance, with a forecast, has a problem to solve with you. A lender who reads it in your statements ninety days later has a problem to solve about you. Same quarter. Different meeting.

None of this is advice on any particular loan. Your banker and your adviser know your situation, and the comfort levels vary by lender and by industry. The point is narrower: sit down already knowing what they are going to see.

The Test

Three questions before your next meeting at the bank:

• Can you state your debt service coverage for the last twelve months, and say whether it is getting better or worse?
• If a slow quarter hit tomorrow, do you know which week the line of credit would run out of room?
• Has your banker ever learned something about your business from your statements before they learned it from you?

If the second one stopped you, start there. The 13-week cash forecast is free at alinement.com/brief/tools/thirteen-week-cash-forecast, and the week the line runs out of room is exactly what it is built to show you before it happens.

When was the last time you walked into your bank already knowing what they were going to see? Share your thoughts.

P.S. Next week: why your leadership meeting slid back to status updates, and the agenda reset that fixes it.