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How to Make Your Business an Attractive Borrower

Although business financing has grown in complexity over the years, the two options you have to raise money to start or grow a business remain the same:

  • Equity: Sell ownership in your business by issuing stock. The stock purchaser becomes part owner of your business.

  • Debt: Borrow the money. The lender becomes a creditor, not an owner.

If your company is more interested in borrowing money than in issuing shares of stock, it must prove to prospective lenders that it has sufficient earnings and cash flow to more than cover the loan payments. You need to know how to make sure your company's financial condition passes inspection with prospective lenders.

Knowing what commercial bankers seek in a borrower

To determine whether your company is likely to qualify for a commercial loan, look at your company's finances as a banker would. Inspect your income and cash flow statements:

  • Income statement: To qualify for a loan, the income statement must show more than enough profit to cover the added expense — interest. A firm operating near breakeven may not be able to take on the additional expense, unless the loan is used to finance a purchase that's very likely to increase profit beyond the cost of the loan. For example, your company may borrow money to purchase a new machine that produces so much more product than the old machine that the increase in earnings exceeds the interest expense of the loan.

  • Cash flow statement: Cash flow also factors into whether your company can afford to make loan payments. The cash flow statement must show that your company has enough excess cash to make interest and principal payments over the life of the loan. If a loan is very likely to result in a positive cash flow, taking on the added expense makes sense.

A cautious banker prefers to loan money to a company that doesn't have much existing debt, because the company doesn't need to significantly increase earnings or convert assets to cash in order to make the loan payments. The banker would love a company with low debt and increasing revenue and earnings.

Some people describe a banker as someone who checks the floor on all four sides of the bed before getting up in the morning. It's a nice visual that characterizes bankers as cautious people. After all, they're lending someone else's money, not their own.

Case study: Apple Computer

In the spring of 2013, Apple issued $17 billion in corporate bonds, its first bond offering in 20 years. Because of Apple's strong history of earnings and cash flow, the company carries a high credit rating. Businesses (and individuals) with strong credit ratings can borrow at comparatively low interest rates.

Triple-A is the highest rating issued to companies that borrow money. A very small percentage of companies have a triple-A credit rating. At the time, the bond rating companies gave Apple an AA+ rating, based on "excellent liquidity and significant net cash balances." In other words, Apple had a large number of assets that it could sell for cash or convert to cash quickly (liquidity). Those assets include current assets, such as accounts receivable.

Apple also had huge cash balances. In fact, the company issued the debt primarily to finance cash needs in the U.S. Much of Apple's cash was overseas. Apple issued the debt, in part, to avoid taxation on cash that it considered moving to the U.S. from overseas.

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