Managers of small and medium-sized enterprises (SMEs) often have to be multi-instrumentalists, solving a wide spectrum of business issues at the same time. However, when the time comes to expand and obtain financing from a bank, versatility alone is not enough. Marius Bačianskas, Head of Lending at SME Bank, advises what homework done in advance will ease and simplify agreement with the bank regarding financing.

“The bank looks at a business not only through tables of numbers, but through the prism of trust. An SME company’s homework – accounting data submitted on time and with quality, a deep understanding of its business financial indicators, and a clear strategy – are the foundations on which we build a mutually beneficial partnership,” says M. Bačianskas.

According to him, submitting qualitatively prepared financial statements on time is not only an obligation to the state. For the bank, it is the main indicator of whether you are managing your business. The bank will pay attention to how promptly you receive accounting data. If in April you still do not know the January results, it signals a lack of control to the bank. Advice: aim to see the previous month’s accounting results by the 15th day of the next month.

Zero tolerance for the shadow economy – an attempt to artificially reduce profit in order to pay fewer taxes is the straightest path to a negative bank answer. The bank evaluates an SME company’s capacity to repay a loan according to official figures.

The expert advises separating the wallets: the company account is not the manager’s personal card. A strict divide between personal and company funds is the first sign of a mature business.

“It is not necessary for an SME manager to have a finance degree, but you must understand three main business financial indicators,” reminds the bank’s head of lending.

According to M. Bačianskas, the three main business financial indicators are earnings before interest, taxes, depreciation, and amortization (EBITDA), liquidity ratios, and margins.

EBITDA is an essential indicator showing cash flows from core activities. Banks always evaluate the Debt Service Coverage Ratio (DSCR), i.e., the ratio between EBITDA and the annual sum of debt payments. The higher this indicator, the lower the risk that the borrower will be late in repaying the loan. If this indicator is lower than 1, it means the company earns less than is needed to cover debts. This indicates negative cash flow and financial difficulties.

Liquidity ratios show the company’s ability to meet its short-term obligations (pay bills, salaries, short-term loans) on time using available short-term assets. These indicators are calculated by comparing the values of short-term assets and short-term liabilities specified in the balance sheet.

Margins show the efficiency and profitability of the company’s activities, i.e., what part of income remains after covering certain expenses. For banks evaluating SME applications, margins are a critical indicator showing the health of the company and the ability to earn funds to repay loans.

Strategic Planning

Bačianskas reminds that the bank does not lend for general needs and will ask to justify the targeted need for funds. In other words, it is not enough to say that working capital is needed; specific arguments and facts are required. For example, we are buying raw materials because we signed a contract with a new client who will grow turnover by 5% in half a year.

According to the bank representative, a good manager must also have a Plan B. “What will you do if raw materials become more expensive or delivery costs rise more than planned? How will this affect loan repayment? Finally, have a detailed market analysis. You must clearly understand what position you occupy in the market and how you compete. A strategy without market analysis looks like speculation to the bank, not a business plan,” says M. Bačianskas.

How to Strengthen SME Financial Literacy

It is possible to strengthen financial literacy by enlisting the help of your accountant. M. Bačianskas suggests treating the accountant not only as a person who submits declarations to the State Tax Inspectorate (VMI) but turning them into a consultant. “Devote 1 hour per month not only to confirming numbers but also to questions for the accountant: ‘Why did our cost of goods sold rise this month?’, ‘What is our break-even point?'”

Ask the accountant to create a simple Excel table, a so-called dashboard, where you would see only the 3–5 most important indicators for you, for example, cash balance, EBITDA, and accounts receivable, i.e., the amount of money that buyers owe the company for sold goods or provided services.

Take advantage of targeted courses or training. In Lithuania, organizations such as the “Innovation Agency” or business clubs often organize free or cheap training for SME managers about financial management and preparing for investments.

Use modern accounting programs that offer visual reports. Seeing a cash flow curve visually is much easier than analyzing a gray column of numbers. Learn to use simple financial modeling templates that allow you to enter variables, for example, what will happen if fuel costs rise by 20%, and immediately see the impact on profit.

“Consult with a bank manager even before submitting a financing application. A credit manager can indicate the weak points of your finances, which you will have time to fix,”  advises M. Bačianskas.