National Clothesline

Most people think that banks are only interested in the interest rate or the security of a loan when deciding whether or not to lend money.

While these are important considerations, the banks usually want more. They can lend money, agreed as fast as it comes in. They could put their entire loan portfolio into consumer loans at relatively high rates of interest without much trouble. But this won’t get them one thing they’re very interested in.

They are very interested in anyone or any company who can deposit sizeable amounts of cash in the bank. This is a major source of their own loan funds. Without these deposits, they can’t lend money. In fact, government regulations require a certain deposit-to-loan ratio at every FDIC-insured bank. So the banker, looking at a business loan application, is not only considering the amount, rate of interest, security, etc., of the loan, he’s also trying to determine how much money your business will be depositing in his bank.

Bankers often insist that you keep a minimum balance in your company checking account as part of the loan agreement or line of credit. This guaranteed minimum deposit assures them of capital to lend and, also, in effect, raises the rate of interest you’re paying because you cannot actually use that money.

Another factor that banks are very concerned with in a business account is the “float.” The time it takes for checks you have written to clear the bank is of vital importance to banks that deal in hundreds of millions of dollars.

For instance, if they are earning 4 percent interest in Treasury bills and they have access to $1,000,000 floating for five days, they pick up nearly $500 extra interest for those five days while the checks are in transit, or floating.

Another consideration is the average balance in your company checking account, above and beyond whatever minimum they may require for a loan. If you accumulate funds until bill paying time

on the first or tenth of the month, you could build up (for example) a $40,000 balance before you write checks. Then if you write $36,000 worth of checks, and it takes them an average of four days to clear, while you’re putting in an average of $1,500 more everyday, by the time your checks clear, you will still never have an average balance of less than $10,000, and possibly more, if your sales are higher between the first and tenth of each month.

If you can convince the banker that yours will become a large enough account and you have the other qualification I’ve discussed, he’ll be begging you to take the loan.

Instead of getting a specific loan each time you need working capital, you can arrange with the bank for a line of credit, like I did. Of course, as with any kind of credit, the best time to apply for this is when you don’t need it. Or, at least, not all of it.

Generally, banks look at an application for a line of credit the same way they would a specific loan application. The difference is, when the amount of the loan is agreed on, it is put on standby for you. It’s taken from the bank’s reserves, and there is a small fee for this service. Once granted, you should begin using it. To use it, you just have to sign a note at the bank and the money is transferred to your account.

A line-of-credit agreement usually contains the follow stipulations:

1. How long the agreement is good for. Usually one year.

2. The amount of the line. (Maximum amount you can borrow.)

3. Type of note signed and rate of interest being charged.

4. The commitment fee. The amount you pay to have the funds set aside for you. This should be 1 percent or less.

5. Be sure to request a no-penalty pre-payment clause.

6. A due and payable clause in the event that you fail to meet payment obligations. In other words: if you don’t pay any part, the entire loan becomes due, immediately.

7. A statement that you will furnish the bank with financial statements on a regular basis.

A good line of credit at a conservative bank is the best recommendation you can have of your ability as a businessman.

I remember once when the local branch of my bank had a complete change of staff, including the manager, just before I wanted to open a new business account for my unincorporated consulting service. The junior assistant was hassling me for articles of incorporation usually required to open a business account. She couldn’t understand that I wanted a separate account for an unincorporated business.

Finally, the new manager came over and said; “Mr. McCrory you have to understand that we really don’t know you.” I replied; “If you really don’t know me, why did the main office grant me a line of credit?”

My new account was opened, immediately.

When looking for a line of credit, prepare carefully before you approach any bank. Have your figures prepared by an accountant if possible. With a well-planned presentation, you can shop for the best interest rates. There may be cheaper money around.

When you draw against your established line of credit, it’s a good idea to rest it. That is, from time to time, pay it all off, even if you have to borrow against it again in a couple of months.

Borrowing is not a sign of weakness or poor business management. It’s a sign of a smart operator using other people’s money to grow his business.

As a businessperson, a sound banking connection is the best asset you have to make your business grow fast.