Chapter 14
What do bankers look for?

Ask accountants why their trucking company clients use them, and half will say it’s to save taxes. The other half will say it’s because the bank wants financial statements prepared by a CPA.

If bankers and other lenders put so much stock in properly prepared financials, it’s in your best interest to know what they are looking for.

Lending decisions are not made on the basis of financial statements alone. The book Loan Policy and Procedures by Edmond E. Pace (Sheshunoff & Company Inc., Austin, Texas) lists the following criteria loan officers look for before approving a loan:

• Determine that the borrower is honest and creditworthy.
• Determine that the borrower is a capable manager.
• Understand the specific purpose of the loan.
• Understand the sources and plan of repayment.
• Evaluate all collateral and backup sources of repayment.
• Find that the loan’s purpose, sources of repayment and collateral are acceptable, reasonable, practical and accomplishable within the normal framework in which the borrower operates.

Notice that nowhere did Pace say, “The borrower must have really neat graphs in his financial statements.” Attractive illustrations might help, but the financial substance must be there to justify a loan. I’ve heard one banker say, “we’re not in the venture capital business. We’re not looking to help someone hit a home run his or her first time up to the plate. We make loans to skilled businessmen with demonstrated skills.” Unless all six requirements are met, it’s unlikely that you will receive a loan.
Financial statements help bankers determine if these requirements are met by answering these questions:

Are you creditworthy? Company financials must demonstrate creditworthiness when analyzed along with company tax returns, personal net worth statements and the owners’ personal income tax returns. The company must have its own capital to add to that loaned by the bank. Most bankers don’t like to see a debt-to-equity ratio higher than 2 to 1.

Consistency also demonstrates creditworthiness. If you show a consistent profit and maintain profit margins as the company grows, you’ll get high marks. Make sure your financial statements present enough side-by-side periods to establish your track record; three to five years is preferred.

Personal creditworthiness is just as important. If your company credit record is good, but yours is a wreck, expect trouble. Bankers see you as the borrower first, and your company second.

Are you a capable manager? The first source of loan repayment for most trucking companies will be the cash flow from the business. Trucking company management experience and the ability to read and understand financial statements are two indicators of management skills. Better yet, show that you have taken corrective actions based on your own financial analysis.
Maintain timely and complete financial reporting systems. Good managers obtain and read financial statements and management information monthly, if not weekly or daily. Your banker wants to see the types of reports you get each month. He also wants to know your procedures for finance committee and management meetings, if you have them.

Show that you track key operational statistics and tie them to the numbers in the financials. Back up the basic financials with measuring and reporting systems that can show the profitability by power unit, driver or lane. Track deadhead mileage and revenue per mile.

What are the purpose of the loan and the plan for repayment? Financial statements may not clearly demonstrate purpose, but they do indicate the reasonableness of the repayment plan. By reviewing your financials along with your previous credit and loan records, the banker begins to see how you will grow revenue and control costs so that you can repay the new or extended loan.

What collateral/backup sources of repayment are available? It’s easy to evaluate most fleet collateral by determining used truck prices. Although the banker insists on collateral, that’s really the last place he looks for repayment. Instead, bankers look at the balance sheet for more financial “shock absorbers” should the company hit a bumpy stretch. The amount and condition of working capital — cash and receivables minus current liabilities — in relation to published industry averages like Robert Morris Associates and the scope of owners’ investment are key. Only after the banker exhausts all these options does he try to sell your collateral.

What is the normal framework? Financial statements are historical. They demonstrate the “normal framework” of management’s abilities and form the basis for the bank credit analysis department’s future-looking projections. Lenders analyze your financial reports over several historical years and make certain assumptions about the next three to five years to create projected financial statements.

Bankers examine dozens of historical and projected key financial ratios and score your company in many ways. In the loan covenants you sign as part of the loan agreement, you’ll likely agree to keep the company’s financial condition within minimum financial ratios and amounts specified.

Are there potential loan problems? In his book, Pace lists financial statement analysis as the first place to identify developing problem loans:

The first indication of a problem loan is usually a deterioration of financial factors such as (1) a decline in profits, (2) a decrease in sales, (3) increased dependence on debt, (4) significant changes in inventory, (5) decreases in working capital. When customer financial statements are received, they should immediately be analyzed to see if problems are developing.

Pace considers the following to be “red flags”: delayed financial statements; lack of borrower cooperation in meeting information requests; bank overdrafts; late payroll tax payments; trade payables growing; complaints from vendors about late payment (they often call bankers); and receipt of fewer early-payment discounts. The savviest bankers see these clues even before getting your financial reports and may place you on the “watch list” of problem loans.

For more information on how bankers look at financial statements, visit the Robert Morris Associates website at www.rmahq.org and look for “Informa-tion Resource Center — Searchable Reference Library.” There, you’ll find instructions on how to search for articles using the keyword “trucking.”

In Summary
When evaluating a loan, bankers typically score you and your company on six factors: ability to pay, financial condition, management, collateral and guarantors, loan structure and industry and economics. Your financial statements are the principal tools used to evaluate the first three of these.