4 signs it’s time to meet with your lender

Finances are just one of the numerous priorities business operators manage. Yet when you’re busy working to meet a multitude of production and other business deadlines, you may miss common indicators that signal its time to meet with your lender.

Reshma Solanki, a senior loans analyst in corporate and commercial financing at FCC, says these four common signs signal it’s time to set up that meeting.

1. Cash flow

Cash flow is paramount and if you find it tightening, that's a surefire sign to pick up the phone and call your lender.

“That indicates to me that lot of things in either the market or the business are really going bad,” Solanki says, adding that business operators must advocate for themselves. “They need to say, ‘Hey, here is my situation; what are my options? what does my cash flow look like?’ They need to start meeting with a lender to figure out how they are doing.”

A lender will review financials, examine where and how much is being spent, evaluate the cash cycle, help consider market trends and more.

Cash flow cycles differ depending on the processing sector, ranging from 30 to 60 or even 90 days. Business owners should manage their cash flow by examining whether their receivables are timely and if they pay their suppliers too early. Establishing strong credit relationships with suppliers can earn additional credit and assist with this. These trends and cycles can help identify potential issues.

“We can figure out how their cash flow cycle is performing, if they are managing it or not and if it's a positive or if it's a negative,” Solanki explains.

2. Fixed versus variable rate expenses

Cash flow issues often involve fixed versus variable expenses. In the food and beverage industry, owners might be burdened by high fixed costs, particularly from lease and rental agreements. Solanki recommends an audit of such costs to ensure you don’t overpay. There may be room for negotiation depending on your business’s profitability.

“If you are in the rental property location and the lease is really high and most of your revenue is going towards that, what's the point?” she says. “Are you really making profit or are you just making money to pay the rent?”

A frequently overlooked variable expense is interest payments. Highly leveraged businesses might face significant interest costs, but restructuring debt can consolidate these payments and save money.

3. Inflation

Inflation is a major concern for small- and medium-size enterprises in the food and beverage industry, where even minor changes can have significant impacts.

At times, a business operator may increase their product price, but Solanki urges business owners to critically think through such a decision.

“Are you factoring in your costs? If costs rise, prices should increase proportionately,” she explains. “You can't ignore this if you want to manage cash flow effectively.”

4. Keep projections realistic

All businesses project how their future numbers will look. Solanki says often the projection margins are too rosy and need to be brought back to reality sooner rather than later for the good of the business.

“If projections are 30 to 50 per cent, that’s probably unrealistic,” she says. “It’s better to be conservative, because what if you miss your projection?”

Play it safe, regularly engage your lender

It's crucial for owners to identify early signs of potential financial trouble. Contact your lender at the first hint of issues to help mitigate or outright prevent problems.

As soon as you notice a decline in your profit margin or face cash flow challenges, consult with experts.

"As soon as you notice a decline in your profit margin or face cash flow challenges, consult with experts; otherwise, you could encounter significant issues later," Solanki advises. "Recognizing these signs early allows an expert to assist you in avoiding further complications in your business cycle."

If you haven't scheduled a call with your lender recently, now is an opportune time. Proactive communication can prevent future headaches and stress.

"Don't wait until you're losing sleep. Speak with your lender," she says. "Your lender can provide clarity on your situation, helping you identify the root cause of your stress and potential problems down the line."

Article by: Trevor Bacque