Talking credit with Mike Strathman: Capacity
What do lenders want to know about your ability to repay debt?
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I want to make sure that when I lend a small business owner money that there is a reasonable expectation that they will be able to repay.
What's the connection between cash flow and capacity?
Cash flow confirms whether you have the capacity to pay or not. Does your business generate sufficient cash flow to pay their existing obligations and the payment on the proposed product? If I see significant cash flow, then that tells me you do have the capacity.
How do you determine if cash flow is sufficient for capacity?
Well, there's a couple different ways and techniques that I would use, depending on the size of the credit. If the amount of credit you're requesting is very small, I'm going to look at your business and personal credit reports to see that you're handling everything responsibly, that your balances are low relative to the credit limits on your credit cards and your lines of credit. Now, the larger the credit that you ask for, then we may have to get your business and personal tax returns or financial statements, and do a more traditional cash flow analysis.
Businesses have fluctuations in cash flow. There can be seasonal dips.
Yes, but somebody that's well capitalized, they can survive their seasonality downturn 'til the next season starts up again.
What tips do you have for a small business owner who's trying to improve their capacity?
First, look at your revenues. Are your products and services priced properly? Where do you stand price-wise against your competition? And try to determine, are there some expenses that maybe they could cut out that aren't necessary to running the business day-to-day? Another is, can you expand your customer base? Are there more customers that you can attract? And if you can get that, then I think you're going in the right direction.