Banking & Lending


This article: This article contains some of the concerns banks have regarding the subject of diversification of customers as well as some of the strategic concerns a business owner should consider regarding diversification of banking relationships.

Customers: Bankers will look at the diversification of the number and types of customers when considering issuing a line of credit (LOC). Specifically, they will look to see if a company’s customers give the bank too much risk. For example, a customer that makes up 25% or more of the entire sales of a company might be considered too risky for the bank. While this may seem counter-intuitive to a company seeking a LOC, there is some logic to the bankers thinking. Bankers consider the risk of lending money to a company that may possibly lose a customer that represents 25% of all sales. The bank then looks at the remaining 75% of all customers to determine the risk of issuing a LOC.

Receivables: Bankers will ask for the company’s most current aged trade receivable report. They will analyze the percentage of receivables owed by each of the customers as well as the aging of each customer. They will ask for a specific explanation for any receivable owned more than a certain number of days (e.g. 45 days, 60 days, etc.).

Report aging: Bankers may ask if the date of aging on the trade receivables aging report is from the invoice or the due date. An owner should be prepared for this question as well as any material ramifications to the aged receivables if the report is aged on the due date of the invoices.

Borrowing base: There are various assets that can be used as collateral, including accounts receivable, inventory and equipment. For example, if a company goes to a lender to borrow money, the lender will assess the company's strengths and weaknesses, and evaluate the borrower's risk. Based on the risk that the lending company feels is associated with the loan to the company, a discount factor of 85% may be determined. If the borrower is offering collateral that is worth $100,000, the maximum amount the lending company will give the company is equal to 85% of $100,000, or $85,000. (

Certificate: Bankers may ask a company to complete a Borrowing Base Certificate when the company asks for money on the LOC. The certificate will disallow lending on certain customers that exceed a percentage of total receivables. The base will also disallow lending on customers that are aged more than a certain minimum number of days (e.g. 45 days, 60 days, etc.).

Internal controls: A company’s staff should be adequately trained to manage, control and complete the Borrowing Base Certificate. Additionally, certain internal control procedures should be implemented in order to avoid a sudden or dramatic inability to borrow from the LOC. For example, a customer may owe $200,000 that is approaching 60 days from the date of invoice. The company may have already borrowed against the LOC on this customer. Weak internal controls and/or accounting staff who are inadequately trained may cause the inability to borrow against the LOC in the event the $200,000 invoice ages past the number of days agreed-upon with the bank and/or is too high of a percentage of all trade receivables. This may cause an unpleasant surprise to the company’s owner when he/she discovers the inability to borrow money against the LOC that the company needs to pay its payroll, rent, key vendors, etc.

Bad debt: Bankers that are considering the issuance of a LOC may ask the company to provide a history of bad debt expense. They may ask for a lot of detail on the specific reasons for the bad debt expense if the historical bad debt expense is a large amount.

Credit approval: Depending upon the types of customers, bankers may ask for the company’s credit approval process for its customers. They may ask for the written credit approval process as well as the forms used and financial information obtained to determine a customer’s credit worthiness.

Bank diversification: The adage of not putting all eggs in one basket applies to banking relationships. Bankers can be a company’s best friends when business is good. Banker can turn into extreme enemies when business is not good and/or when a bankers make strategic decisions to completely get out of a certain industry. Good strategy dictates that a business owner and its professional team consider the subject of diversification of banking relationships. For example, a company may want to do its banking and lines of credit (LOC) with one bank, its equipment or other long-term asset lending with a different bank and notes or mortgages on buildings with a third bank. This diversification of banking relationships might serve a company well in the event that one of the three banking relationships turns sour.