Take That One to the Bank

How to ease cash flow challenges and grow your "small" landscape company by making it more bankable.

Steven Cohen, principal of GreenMark Consulting Group
Steven Cohen, principal of GreenMark Consulting Group

As a small landscape company owner, many of you face similar challenges. Generating profitable sales and finding good employees always seem to be at the top of the challenges list. But managing cash flow remains the biggest obstacle in stabilizing your business finances in order to grow to the next level.

In our experience, more than 75% of business owners are using cash flow to fund growth. Most owners find this to be a delicate balancing act of timely billing, wishing customers pay promptly, and hoping that the trip to the mailbox is stuffed with checks. The question is: Does growing your business really need to be so stressful financially? The answer is no—if you plan and work to build your business to be "bankable".

In getting your landscape company eligible for business loans, you must grasp what banks need and expect. Most company owners think a bank line of credit is the easy answer to smooth out their cash flow. However, qualifying remains a challenge for many, if not most, landscape companies. While banks have raised their credit standards since the downturn in the economy, private companies shouldn’t give up. Instead, take the steps required to build a bankable company.

In this article, we are going to discuss three ways to make your landscape company bankable. In preparation, you must first tighten up your books. Second, you must be prepared to highlight your strategic thinking as it relates to managing your business. Third, you must align your thinking with what the bank is required to collect from you.

What you need to know about banks

There is a common misbelief that banks are quasi-government agencies morally obligated to “help" business owners who need money. This is not true. Banks have to make a profit every quarter and every year, just like you. They are heavily regulated to keep from losing the deposit dollars they turn into loans. You‘ve heard the whining about excessive government regulation in banking, but you may not understand how that affects your ability to get a loan.

The reason you need a borrowing relationship that meets your needs and works for your bank is because sales and cash flow swing wildly every few months in our industry. Your banker calls this “seasonality”. High seasonality puts operating and financial pressures on your business.

You know what operating pressure look like. For instance, what’s the right mix of commercial vs. residential customers? Which materials should we pre-order? How many full-time employees do we need without over-spending on payroll? Which equipment should I rent instead of own?

The swings create financial pressures too. They drive your need for extra cash in the checking account at certain times throughout the year. Swings make it harder for you to predict your future and create more opportunities to run out of cash. Commercial loan officers have had a saying: “A borrower may lose money sometimes but they only get to run out of cash once.”

4 ways contractors misuse lines of credit

The seasonality of our industry is a good fit for bank lines of credit. But most landscape company owners misunderstand the purpose and use for the line. What causes trouble with your bank?

1.  Using the line to pay bills because you lost money for the year

2.  Using the line to meet excess payroll because you can’t manage turnover

3.  Using the line to let your customers string you out

4.  Using the line to buy equipment because it’s inconvenient to apply for an installment loan

Any bank lending money to landscaping companies is gambling that you might not be able to repay the loans exactly as agreed. Some banks can live with this and some cannot. All banks have to document for the examiners that their borrowers have a better-than-average probability of paying off their debts exactly as agreed.

6 things your bank really wants to see

Here are the top things your bank will need from you to show the examiners that your company is a good risk.

1.  A relevant, well-thought-out profit plan.

2.  Business tax returns (1120S or 1065) completed by a qualified accountant. If your business shows up as a Schedule C on your personal tax return, you’re telling the bank you’re a landscaper, not a stable business. They don’t make business loans to worker bees and can’t give you credit for your assets, liabilities or net worth.

3.  Business financial statements that are done right. Telling your accountant you won’t pay for monthly financial statements is telling the bank you are winging it.

4.  Personal tax returns that show your household has other income than just your business and less expenses than income. Banks are required to get two or three different sources of repayment for business loans. If you don’t have other income sources, you deprive them of a requirement.

5.  Personal financial statements that show you are saving enough of your take from the business to cover surprises and setbacks—at home and at work.

6.  Personal credit report that demonstrates a long pattern of paying what you owe.

The bank will use this information to figure out if you have a business or a job, along with whether the business can make more than it needs from the bank over the long haul. Points of scrutiny include:

  • A large, stable customer base (revenue) that pays well (receivables)
  • Management’s skill at controlling costs of doing business (materials, inventory, suppliers, labor and overhead)
  • Recurring profits (after taxes)
  • Excess cash flow (after all payments and reducing the credit line back to $0) when the seasons are done
  • Enough liquidity to cover day-to-day operations and overcome normal business challenges
  • The right expenses to reduce your risk of failure from abnormal business challenges
  • Useful assets that create income and are worth more (worst case scenario) than you owe against them
  • A positive net worth appropriate for the time you’ve been in business

How to build a good relationship with your bank

Building a relationship simply starts with how you manage your checking account.

Next, communication is one of the most important aspects in building a relationship with your bank. If you only deal at the branch level, ask to speak with a bank market relationship manager. A great time to tell your story is before you need a loan. Share how your business started, where it is now, and where you see it going.

A flow of information, even at the simplest level, will put the bank at ease—especially if you are already borrowing even at the smallest level. Aim to meet with your manager to provide periodic updates. Include your accountant. Even if you are not ready to present your loan request package at this time, frequent communication will quickly build a relationship and element of understanding of what your business is all about.

Never leave out the bad news

Banks do not like surprises! If you are committed to regular contact, the communication between you and the bank should also include any business challenge you may have. This might not be as important if you are not borrowing. But if you do have a loan, an early call about a problem, whether large or small, is better than the bank hearing about it through the grapevine.

Even when a situation is not a potential business destroyer, a phone call to inform, especially if it could disrupt your cash flow, would be appreciated by the bank. You gain their credibility and trust by showing leadership. The willingness to share both good news and bad news will demonstrate that you can manage your business effectively and dispassionately.

Ask the bank to visit your company

Seeing a business on the ground is the best way to understand how it really works. Invite the manager to visit your premises—as long as your premises convey the impression you are looking to create, of course. In fact, a loan officer who is not willing to invest time getting to know your business is not going to be a good strategic partner. Many bankers, after taking a tour and having an on-site meeting with management, can easily sense an atmosphere of excitement, or perhaps desperation.

Remember, it’s going to take work to build a banking relationship for your business today. But when your cash flow isn’t large enough on its own to seize that great opportunity, it will be worth it. Work now to grow your business management for a better tomorrow.