Turned Down by the Bank

Successful business owners deserve direct rewards for their business success. Thoughtful and accurate planning goes a long way.

A number of years ago, a relatively new and rapidly growing startup came to me with a problem: the bank turned them down for a loan.  Because of their rapid growth, they were having cash flow issues.  Payroll and vendor bills were coming due before they could collect enough of the receivables.  The big surprise was the failed bank audit—what happened?

Turns out the accounting system wasn’t keeping up with the growth.  Checkbook accounting was fine for the first year or so, but when the company hired a number of new people and expanded their services, the old system couldn’t keep up nor give the bank enough comfort that the owners had enough control to meet the bank’s monitoring requirements.

A straightforward fix 

We installed new software, put procedures in place, upgraded the skillset of the people doing the bookkeeping and created meaningful reports that the bank expected and management then understood.

A few months later, the auditors were back and we gave our banker a much more coherent business plan along with a near-term cash forecast.  Shortly thereafter we celebrated our newly granted asset-based line of credit.

The results

With this line of credit, we were able to finance our receivable growth as long as we didn’t allow many past due accounts.  This convent kept management on their toes and focused on quality customers.  Unfortunately, the bank had a fairly laborious reporting and deposit processing system. I used to joke that I needed the bank’s permission just to sneeze.

Since we performed so well and stayed in compliance, we were able to increase the percentage of receivables that we could finance.  They also agreed to increasing the loan amount to include 50% of inventory.  That was unheard of.  As a direct result, we were able to skip an entire round of equity financing that significantly enhanced the foundering team’s ownership position when we finally sold out to a much larger company years later.

Our growth rate was directly related to managing the margins, keeping the overhead appropriate, and ensuring constant year-to-year profit.  That kept our bankers happy.  

There were many temptations to granting bonuses and expanding overhead especially as revenue and complexity grew.  Balancing the needs of a growing company, and the management and their personal needs (such as buying new cars and a big house) required skill, compromise and planning.

Successful business owners deserve direct rewards for their business success. Balancing those needs against the cash-consuming needs of the company is a challenge.  Do you take on more equity?  Do you borrow more?  Do you defer buying a new home until the spouse threatens divorce?  No simple formula.  Thoughtful and accurate planning goes a long way to help direct the boardroom discussion in a positive direction.