I took the financials from a trucking company into my credit guy.
I was excited until my credit guy told me we couldn’t do the deal.
Not now. Not ever.
“Why?” I said.
He pulled out a piece of scrap paper.
3 lines was all it took. It was simple math.
1. The trucking business currently has a balance sheet leverage of 5.5x ($30M of Debt to $5.45M of Tangible Net Worth). We finance companies with less than 3.0x balance sheet leverage.
2. The owner NEVER left the earnings from any year in the company THEREFORE Tangible Net Worth would not increase materially.
3. The business had a operating life of 4-5 years on the trucks it ran over the road so it was not building equity in the equipment as the debt amortized at the same rate. At the 4 to 5 year mark, the debt was paid down or off. Then a new truck had to be acquired.
No reduction in balance sheet leverage. EVER.
– The credit guy didn’t need to hear the story about how the business was growing (that would only make this situation worse).
– The credit guy didn’t care about the profitability of the business (every bit of profit just left the company at year-end).
– The credit guy didn’t want to know about the succession plan the company was putting in place to ensure the longevity of the business.
I felt terrible. I didn’t know how I was going to explain it to the company owner who was my friend.
I finally gathered the courage to tell the company owner we couldn’t do the deal AND WHY.
That was a game changer.
When business owners understand the why, from the bank’s perspective, they can decide if they want or need to change something in their business.
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I post weekly about banking, data science and family adventures.
Digging deep on banks is what I do. If you would like to identify banks with excess deposits, reach out and we can connect you with simple reporting to provide these answers.
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