I recently spoke with Rory Johnson, a Vice President of Commercial Lending at Central Bank. Rory and I have been long-time friends, so I thought I’d ask him for his perspective on what’s hindering many businesses. It was no surprise that we eventually drifted to an old familiar theme: Managing cash flow.
As we’ve noted in many previous posts, effectively managing your cash flow is a critical part of your business. It doesn’t matter if your business is doing great or if it’s in the dumps; managing cash flow is paramount.
Rory notes that comes as a huge surprise to businesses that are successful. “You might be killing it with sales and you need to buy more capital, but the money hasn’t caught up,” he said. “That’s when a hiccup can kill you.”
The “hiccup” he alludes to is similar to one we discussed in our article on cash traps. You’re doing great, picking up huge orders, and then all of a sudden, one of those huge orders goes past due on a bill. Suddenly, you have no cash, and your lender, aka a guy like Rory, is calling about your loan payment.
“It’s those spurts that get many businesses in trouble,” he said.
Managing and financing growth is a huge problem for entrepreneurs, who know how to produce goods or services, but may not know how to manage the operation.
Naturally, it’s also the downfall of the struggling business, which really runs into problems when their receivables are over 90 days past due.
Lenders Can Only Do So Much
I imagine it’s a tough role for a lender like Rory. He has to understand your business before he lends you the money, and make sure that the risks are in line with the bank’s guidelines. After that, he’s also heavily reliant on you executing.
This puts the bank in tough spot. It’s their money that’s ultimately on the line, but they need you to succeed in order to capture their interest. Add to it that most borrowers view a banker as a child would a parent, and not “fess up” when things aren’t going great.
Of course, many entrepreneurs possess an entrepreneur’s optimism, so always expecting tomorrow to be a better day is natural. However, there’s a difference between rose-colored shades and understanding sound business fundamentals. But Rory really doesn’t try and interfere. “It’s a fine line,” he said. “We don’t try to tell them how to run their business.”
However, the bank can and will step in if the situation gets bleak. One example is when cash flow slows for a client. In this case, Johnson’s bank may refer a client to an asset-based lender, who will make loans based on the receivables. “An asset-based lender is more likely to provide a line of credit on receivables than a more conservative commercial lender,” he said.
Rory wishes clients would lean more on him for advice. “Businesses really tend to struggle when it comes to managing their finances,” he said.
How to Help a Struggling Businessman
Rory notes the toughest part of his job is dealing with a customer who is struggling. “We try to help people, but they have to be forth-coming,” he said. “But it’s hard to talk about things when they’re not going well.”
Just as with the case of the business that’s succeeding, poor cash-flow tends to undercut the business where sales are dwindling. As we’ve noted on this blog, most entrepreneurs don’t have the patience to really comb through their finances and find out what’s killing their cash flow.
The natural inclination is to try to drum up more business, and sell more products. But that can only exacerbate the problem, and can often lead a company into a cash trap.
Usually the more solid the relationship, the easier it is for Rory to help in cases like these. “A business owner needs to know his banker. He needs to know that we care about him, and that we care about the business,” he said.
How much monitoring does a commercial lender do with a borrower? While it’s dependent entirely on the lender, the larger the business, the more attention it will receive. Based on the size of the loan, Rory and his team will track receivables and look at the borrowing base for the company. They scrutinize lines of credit more carefully than term financing deals, which they monitor quarterly.
“It’s tricky, as certain businesses cycle with the season,” he said. “You have to keep on eye on where they’re at in the business cycle.”
The key, Rory believes, is to be proactive. “You have to get to the problem early,” he said.
That’s why you need to closely monitor your cash flow. It will help you ward off problems before they start, and get your business heading in the right direction. Then you can call a guy like Rory and ask for a loan to expand, not contract, your business.
Photo by: See-ming Lee 李思明 SML