The 5 C’s of Credit: Cash Flow is King - Innovate New Albany | New Albany, Ohio

The 5 C’s of Credit: Cash Flow is King

In our introductory blog, we alluded to the concept of a funding continuum for businesses. When you, your family, and your friends invest in your business, it is because of a personal connection or emotion and less about data crunching.

The next step on that continuum is using expensive credit options such as credit cards and home equity lines of credit, the latter being collateralized with a personal asset. When you approach angel funds and other investors, your pitch becomes much more centered on the business and what return the investor will receive. Your business might have a bottom line, but it may not be very robust. These latter sources of funding are expensive, but that cost coincides with the risk the investor is taking.

Banks aren’t as interested in taking similar risks. The trade-off is that the interest a bank charges will be less expensive than your previous funders. However, you will need to prove to the bank that you can repay the loan.

Having revenue and a positive bottom line is critical for a start-up to obtain a bank loan.

Although you may view this as harsh, you need to consider that a bank’s basic operation is to take a depositor’s cash and lend it out to you. Every bank need to assure its depositors that it is doing its very best to protect its depositors’ money.

Your goal should be to have a bottom line that is in the black. You and your bank are aligned in that pursuit, so when your business has jumped that hurdle, provide the bank with compelling data to make your loan request more appealing.

Our advice is to DO THE MATH!

Don’t rely on the bank to crunch your numbers without your guidance. It is always better to show the bank how you are going to manage your business and how you will use the bank’s money to provide a good return for the bank and for you.

Here are some ideas on how to showcase your cash flow.

  1. Put together projections.
    These projections should show the bank how its loan proceeds will help you increase revenues and/or decrease expenses. For example, if you are using the proceeds to buy equipment that will be more cost effective and efficient, work through the numbers to show those benefits. Remember that your projections should include the entire business, and not just relate to the use of the loan proceeds.
  2. Include contingencies in your projections.
    All businesses stumble now and then; how they recover will indicate their success. By incorporating some sensitivity analysis, commonly known as “what if” scenarios, you will show the bank that you have thought through potential issues.
  3. Don’t skip the details.
    If you are using a line of credit for working capital, perhaps to take on a new client’s product needs, then make sure you accurately report the margins on that new business. Too often businesses, both large and small, take on large orders that boost revenue but demand lower margins. Make sure you understand whether or not lower margins will be additive.

Take the time to really work through your numbers. That effort will help you feel confident that your request is viable and will show the bank that you have looked at the loan’s upside and downside.

Do your homework, do the math and be prepared. Your chances of obtaining a loan will be far better received by the bank when it sees your hard work.


Sue is a partner at 2SJ Consulting LLC and co-chair of X2 Angels. She spent 35 years in wholesale banking, spanning both middle market, national accounts, and wealth management. Sue has extensive experience in financial analysis for individuals, corporations, and real estate, allowing her to help consumers and businesses attain their goals and minimize risk.

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