How do you know when your business is finally bankable?

Bankability is not a feeling and it is not a credit score. It is five conditions, and you can test all of them yourself before you speak to anyone.

Test one: two filed tax returns showing profit

Not projections, not interim statements, not a good year in progress. Two completed fiscal years, filed, with taxable profit. A bank will usually verify them against IRS transcripts, so the returns it reads are the returns you filed.

This is the test that sets the earliest possible date. A business that began trading in March of year one has its second complete year end well over two years later, and the return itself arrives months after that. Work out the calendar date before you build a plan around it.

Test two: coverage, including the loan you want

This is the test that decides most files, and it is the one to run first.

Total debt service becomes 18,000 + 50,404 = 68,404. Coverage is 96,000 ÷ 68,404 = 1.40. Against a 1.25 floor, that passes.

Run the same business a year earlier, at 78,000 of cash flow: 78,000 ÷ 68,404 = 1.14. It fails, and the arithmetic tells you by how much. At a 1.25 floor the cash flow required is 1.25 × 68,404 = 85,506, so you were 7,506 short. That is a number you can do something about — a price increase, a cost removed, a smaller request, or a longer term.

Work the other direction too. At 96,000 of cash flow and a 1.25 floor, total supportable annual debt service is 96,000 ÷ 1.25 = 76,800. Less the existing 18,000, that leaves 58,800 a year for new debt, which at the same rate and term supports a loan of roughly 376,000. You are asking for 200,000. You have room, and knowing that changes how you negotiate.

Ask your bank what its floor is. They will tell you. It is not a secret and it is usually a stated credit policy number.

Test three: tangible net worth, positive and rising

Assets less liabilities, excluding intangibles like goodwill.

The first is a business with no equity cushion at all. The second is a business that has retained earnings. Most bank credit policies set a maximum debt-to-worth, frequently in the range of three to four times; ask yours what it uses. Note what improved it: not revenue, but retained profit. Every year you take everything out is a year this ratio does not improve.

Test four: clean statements

Twelve months with no returned items, no negative days, no overdraft fees, and ending balances that are not zero. Consistency matters as much as size.

This is the fastest test to fail and the hardest to argue your way out of, because it is not an interpretation. A returned item in month eleven is a fact on a document.

Test five: collateral or a guarantee with substance

Banks lend against a secondary source of repayment. That means business assets — receivables, inventory, equipment, property — and the owners' guarantees. Under 13 CFR 120.160, on SBA loans "holders of at least a 20 percent ownership interest generally must guarantee the loan", and conventional banks apply similar policies.

A guarantee from someone with no assets is not a secondary source of repayment. If nobody in the ownership group has substance, expect the collateral requirement to be correspondingly harder.

The order to run them in

1. Coverage. Ninety percent of the answer. Ten minutes.
2. Tax returns. A calendar fact. Check the date.
3. Statements. Pull twelve months and look for returned items. Five minutes.
4. Tangible net worth. From the balance sheet. Ten minutes.
5. Collateral. List what exists and who has a security interest in it already. Search the UCC index if you are not sure; prior filings you had forgotten are common and they determine who is first in line.

If all five pass, you are bankable and should be speaking to banks rather than to anyone who calls you. If four pass and one fails, the failing one is your project and the arithmetic above tells you its size. If three or more fail, the honest answer is that you are twelve to twenty-four months away, and the useful work is on the specific conditions rather than on applications.

What to have ready

Two years of filed business returns plus the owners' personal returns. Interim financials to a recent month end. A current debt schedule. Twelve months of statements. An accounts receivable and payable ageing. A personal financial statement for each owner above the guarantee threshold. Your calculations from the five tests, shown as working.

What to refuse

Refuse to apply to a bank while test two fails. The decline is not free: it costs you a hard pull, a relationship, and the six months before you feel able to go back.

Refuse to treat a decline as a verdict on the business. Ask which test failed and by how much. A bank that tells you is giving you the specification for your next twelve months, and it is the most valuable thing you will get from the conversation.