In a capital-intensive industry like transportation and logistics, a strong relationship with your financial institution can improve your bottom line by generating thousands of dollars of profit or enabling you to negotiate a better interest rate or a higher line of credit.
Here are the steps to take to ensure you think like a banker and put your best foot forward when applying for a loan or a line of credit.
Get Clean Financials
Bankers speak the language of accounting. The only way they can assess the value of your business is if they see it translated into familiar terms: a profit and loss statement and a balance sheet prepared according to industry standards.
When bankers see a roller coaster of financial statements, that leads to questions. Questions lead to doubt, which lead to a lower borrowing limit or less attractive payment terms.
When they see statements prepared according to GAAP (Generally Accepted Accounting Principles) using industry best practices, the conversation starts on a strong footing.
What bankers will ask about your finances:
- Are you using the accrual method (expenses matched to income)?
- Are prepaid expenses – such as insurance and fuel cards – booked correctly?
- Are you making monthly bookings for future insurance claims?
- Are you accruing insurance according to the terms of the policy?
- Are you taking write downs for failed collections and recording a reserve for estimated future bad debts?
Clean financials are not just about impressing the banker, although they really will make a difference in terms of what you are offered. They also are the basis of your whole financial strategy. Once you have a balance sheet and a P&L, a dynamic forecast helps you anticipate what you will need regarding operating capital and equipment loans so you’ll understand how much to ask for.
Negotiate the Terms of Your Line of Credit
Your approach to a credit line negotiation, including the period, rate, personal guarantees and the amount expended, will depend on whether you are seeking a brand-new line or extending a current one.
If it’s a brand-new line, ask yourself: what’s my borrowing potential? Typically, banks will grant a line for 80% of receivables and 50% of inventory.
If you’re trying to improve a line of credit, ask yourself: can I improve the terms? Say you have your line based on the receivables/inventory percentages stated above. Can you get your bank to be a bit more flexible? Can you get a better rate if you extend the period?
For example, while receivables past a certain number of days or unbilled receivables are excluded from the calculation, it’s possible to convince a bank to include them – if you can back it up with statements.
Negotiate Equipment Loans
Transportation companies expect to negotiate equipment loans regularly. The cleaner the financials, the better the interest rate. Even .25% better will make the difference of tens of thousands of dollars per year.
With clean financials, you’ll be in a position to shop around and make sure your interest rate is competitive for the market. Working with a financial professional with established banking relationships can also help ensure you get the best rate.
Calculate the Cost Versus the Opportunity of Borrowing
When you look at your loan paperwork, you see the direct cost: the interest rate you’ll be paying. A forecast can help you see how those payments will impact your cash flow.
But there is also the opportunity cost—sometimes, the interest rate can yield a significantly higher gross profit than expected, for example, if the extra cash makes it possible to take on a well-paying job.
Thinking Like a Banker Means Improving Your Business
When you think like a banker, you work to communicate your business’s true value. That means using a language that anyone outside your business can understand: accounting. Whether you plan on walking into a bank tomorrow, next month or next year, start getting your finances in order today. Your bottom line will benefit.
Learn more about our virtual CFO services for transportation and logistics businesses and how we help our clients “think like a banker” by scheduling a consultation below.
