How to get your business "credit-ready".

In loan transactions, collaboration and good communication play a vital role. That's why it may be helpful to review some of the criteria that banks use in evaluating loan requests, as well as some guidelines that can help speed the process for you. Here's how to help your bank help you.

Be Specific About Your Needs

It's important that you have a clear and definite use in mind for the loan request funds. Saying that a loan is for "working capital" is too broad, and may convey the impression that you don't have a concrete plan of action for putting the funds to use and for paying them back. However, a request for funds to support seasonal buildup in inventory or to take trade discounts offered by vendors would start things off on the right foot.

Have a Plan with Measurable Results

In addition to reviewing your track record for executing past plans, banks look for plans going forward that are well thought out and measurable. Be sure to have a method for tracking and reporting to the bank on your progress, including intermediate benchmarks and expected completion dates. Banks use your business plan and benchmarks to set covenants to monitor financial performance and measure your company's financial health, so knowing as much as possible allows them to evaluate you fairly and with the big picture in mind. Benchmarks are especially important if your company experiences seasonal sales spurts, because your plan would reflect a corresponding usage on the line of credit, as well as cyclical increases in inventory and accounts receivable.

Revise Your Plan When Appropriate and Keep Your Bank in the Loop

We all realize that things don't always happened as planned, but surprises could work against you, so let the bank know as soon as possible if benchmarks are not going to be achieved, and why. You may need to readjust benchmarks for the new market scenario, and the bank might want to adjust its covenants and, if necessary, restructure your loan to better fit your financial picture.

For example, if your actual revenue growth is twice what was planned, it could strain your working capital as evidenced by increasing accounts receivable. This could lead to cash shortages as the timing of vendor payments exceeds new accounts receivable collections. While increased revenue is usually a good thing, the strain on cash can cause an imbalance. Tracking monthly revenue or backlog would provide an early warning to this scenario, and the bank's awareness of the situation could lead it to temporarily increase your line of credit to bridge the cash crunch. In other words, by working together, the bank and customer can deal with an increased need before cash becomes critical.

Control Your Cash Flow by Utilizing Assets Effectively

In general, companies that have financial problems and are consequently less "creditworthy" have experienced a sales slowdown without a commensurate reduction in expenses and implementation of plans to stabilize the cash flow of the business. A typical manifestation of slower sales is inventory levels that are higher than normal. Inventory can represent a large investment (and drain) or cash for a company, and how managers deal with turning this asset speaks to their skill and knowledge of their industry and competitors.

That's why banks consider industry averages for turns in inventory, accounts receivable, and accounts payable as a measure of a company's ability to effectively manage its assets. Slower turns can indicate stale inventory, "me too" products in the market that erode sales, or credit terms that are too liberal, all of which can raise flags for banks. Additionally, delaying your payments beyond agreed-upon terms can lead to untimely delivery of raw materials or being required to pay COD.

Helping You Get the Credit You Deserve

While some of the measures described above should take place prior to requesting a loan, a bank catering to businesses will assist you at every step.

This article was provided by Comerica Bank. Comerica Bank has $54 billion in assets and focuses on relationship banking for small- to mid-sized businesses. Rick Pankow is Senior Vice President and Manager of Comerica's Middle Market Group in the San Fernando Valley, with offices in Sherman Oaks and Woodland Hills. For further information about this article or to discuss creative solutions for your financial needs, please call [phone].