Word of the Day: Bankability

by MO.com Subject Matter Resource Dr. Greg Bier

After three or four years the economy is dragging itself out of the ditch. Are you ready for it? Both the Wells Fargo/Gallop Small Business Index and the CNBC.Com Small Business Council survey found that small business owners intend on increasing capital spending this year. In order to take advantage of a recovering economy entrepreneurs need cash in order to grow too. But is capital available? While the SBA set a record last year with 60,000 loan approvals for $30 billion what does it really take to be part of the recovery? Bankability.

The Wells Fargo/Gallup Index also revealed that 38% of small businesses expect it to be difficult to obtain credit. Why? Bankability.

What lies in the difference between 60,000 SBA loan approvals and the 38% expecting difficulty getting access to capital? Bankability.

In order to take advantage of the fact that you survived the last few years and now want to have your small business thrive you need to be bankable. In order to purchase inventory, renovate facilities, buy new equipment, and create jobs, you’ll probably need to borrow capital. Your lender will use a set of indicators to gauge your potential ability to pay the money back. The indicators are no sure fire means of measuring the success of a new venture but they do differentiate those clients that are less risky from others. YOU must be bankable and YOUR VENTURE must be bankable.

As an entrepreneur, what makes you bankable?

• Income. Income documentation comes in many forms, W2, 1099, 1040 Schedules C, E, or K for example. The easier it is to demonstrate that you have a credible income stream the easier it will be to borrow against it.

• Debt-to-Income ratios. It is extremely important that everyone understand their debt-to-income (DTI) ratio. While every lender is different, a common rule of thumb is to avoid a DTI ration beyond 45%. YOU control this number! It is important to realize that if you are asking for credit there are measures in place to determine your ability to repay the loan. DTI is one such measure. It takes emotions and personalities out of the equation.

• Reserves. Assuming that Murphy’s Law will bite you and your business periodically you’ll need to be prepared to cover some unexpected expenses. Your reserves can come from savings, a 401K, a personal line of credit or even a home equity line of credit…but you need to prove that you can cover a certain dry spell.

• Credit score. Your credit score indicates your historical ability to make timely payments. It will also point out liabilities including revolving credit lines. Make sure that the debt portion of your DTI matches what your credit score reports.

Lenders, like lawyers, like facts. Individual bankability are your facts. What can put your loan application on top of the lenders pile? Like anyone else, lenders want to process the easy loan. So make it easy on your lender; readily document that you are bankable and present an organized business portfolio.

What makes your venture bankable?

• A business plan. Some of the best business plans are written by the clients themselves. Need help? While the business plan is no guaranteed victory story it is an indication that you’ve done your analysis and planning. It shows that you understand what it will take to manage, operate, finance, and market your venture’s growth. In war, battle plans do not survive the first engagement with the enemy. However, the battle is typically won before it even begins. This is due to the thinking and planning that went into the preparation for the engagement. Business plans are no different. Lenders understand that the business plan is just a guide not a bible. However, it helps differentiates winners from losers. Be a winner. Have a well thought-out plan.

• Advisors. Do you have the support network already in place, including a lawyer and accountant, to provide you with timely expert advice when you need it?

• Purpose of the loan. Ensure that your application indicates the purpose of the loan. If the load is to build or expand your business ensure that you emphasize that any hard assets such equipment purchases are additional collateral.

Being bankable is defined differently by different lenders. However, the key indicators remain the same. Make it easy on your lender by documenting what they want and being clear about what your capital objectives are.

According to Wikipedia bankability isn’t even a word. It takes capital to grow. No one said getting it would be fun. But being aware of your bankability makes it easier.