Lesson B202.6 · Business Finance 202: Build a Business Worth Buying
Banking at year three and beyond
6-minute read · Figures checked October 2026
Photo: Andrea Piacquadio / Pexels, Pexels License
The short answer
After a few years of clean books, you can ask more of your bank. If you borrow, ask for a line of credit sized to your business, payments that follow your season, and fewer guarantees and liens over time. Read every covenant before you sign, because a covenant is a promise the bank tests on a schedule. Borrow or not, meet with your banker once a year, before you need anything.
What changes after two or three years
Two or three years of tax returns and monthly statements give a banker something to underwrite. One bank's published guide looks for at least 2 years in business under the same ownership, longer for volatile or cyclical industries. By year three, your file can show steady cash flow, a debt service coverage ratio (DSCR) above the lender's minimum (banks often prefer 1.25 or higher) and liabilities in line with net worth.
That's the time to fit the bank to the business. A line of credit covers timing, not losses: draw it against signed, billed work and pay it back to zero every year from collections. Loan payments can sometimes be set to the season, with smaller payments in winter. A truck or equipment loan that ends before the machine wears out costs more each month but leaves no payment on a machine you've stopped using. A longer term lowers the payment and can leave you paying on worn-out equipment.
Bigger loans bring bigger paperwork. Lenders ask for more assurance on your statements as loans grow; Ameris, an equipment lender, asks for reviewed or audited statements on loans over $250,000. A CPA review costs more than a compilation, and an audit costs more than a review, so ask what the bank needs before you pay for one.
Covenants: the promises inside the loan
A covenant is a promise you make in the loan agreement, and the bank checks it on a schedule. Common ones: keep the DSCR at or above a set number, keep total liabilities under a set multiple of net worth, send statements by a deadline, keep insurance in force, and don't take on other debt or sell major equipment without the bank's approval. Missing a covenant can let the bank freeze or call a line, even if you never missed a payment.
Example (made-up numbers). Nadia (example) owns a 12-person sealcoating and striping company. Her loan requires a DSCR of at least 1.25, tested at year-end. A wet fall leaves $90,000 of cash available for debt payments against $80,000 of payments. $90,000 ÷ $80,000 = 1.125, below the covenant, though every payment went out on time. Nadia calls her banker in November, before the test, with her numbers and a plan, and asks how the bank handles a miss.
Ask three things about every covenant: what exactly is measured, how often it's tested, and what happens if you miss.
Questions to ask after two or three years
| Question | Why it matters |
|---|---|
| How large a line of credit can I get, and is it based on revenue, receivables or cash flow? | It sets the cushion you can count on |
| What's the rate: which index, what margin, any floor, and what fees? | The quoted rate is only part of the cost |
| Does the line require a yearly pay-down period, and when? | A spring pay-down can hit your busiest buying month |
| Can loan payments follow my season, with smaller payments in winter? | Payments match the cash coming in |
| Which covenants apply, how often are they tested, and what happens if I miss one? | Missing a covenant can let the bank freeze or call a line |
| Which loans need my personal guarantee, and what would it take to release it? | A guarantee puts your personal assets behind the loan |
| What collateral do you take, and will you release liens as loans are paid down? | A blanket lien can make other lenders hesitate |
| Can you refinance higher-cost debt such as cards, cash advances or dealer financing? | Often the fastest cash-flow win |
| How long a term will you give for trucks and equipment? | A shorter term costs more each month; a longer one can outlast the machine |
| How are deposits over $250,000 protected? | Reciprocal deposit networks can extend coverage |
| Who decides on my credit: someone local or a central office? | A local decision can weigh your history |
| Can we meet once a year to review my numbers before I need money? | The bank sees the business before you ask |
Two paths: wait a year or buy the building now
Two ways to go
Keep renting your yard or shop for another year, or buy the building now?
Conservative path
Wait a year and keep renting
Keep the space you rent, build cash and one more year of clean statements, and meet your banker before you're ready to buy.
- Cash
- Rent keeps going out, but your cash stays in the business for the season.
- Risk
- The building you want may sell or cost more next year, and a landlord can change the rent or the lease.
- Time
- One more year of tax returns and monthly statements for the bank to underwrite.
- What goes wrong
- The year goes by without the savings or the cleaner books, and you're no closer to buying.
Bolder path
Buy the building now
Own the space, with a loan the bank underwrites from your statements and cash flow.
- Cash
- A down payment and closing costs come out of the cash that carries the business through winter, and a loan payment replaces the rent.
- Risk
- The building backs the loan, the loan can carry covenants the bank tests on a schedule and a personal guarantee, and repairs are yours.
- Time
- The bank's underwriting and the closing come before you get the keys.
- What goes wrong
- A wet season drops cash flow below a covenant, as in Nadia's example above, or the down payment leaves too little cash for the slow months.
When each fits
Waiting fits when you have fewer than two or three years of clean statements, your cash after a down payment wouldn't carry the business through winter, or your current loans already press on the lender's DSCR minimum. Buying now fits when the bank's numbers already work, the payment fits your slowest months, you've read every covenant and guarantee, and the space fits how the business will run for years. Your banker, your CPA and an attorney can each check a piece of the deal.
Different approaches
Where respected teachers differ
Ramsey's EntreLeadership teaches that the right amount of business debt is zero: build cash, be your own line of credit, and pay cash, rent or buy used for equipment. Many owners finance equipment under strict rules. The National Pavement Maintenance Contractors Association (NPMCA) teaches cash-first, and if you borrow, the five Borrowing Rules.
Your Move
Do this week
- Book an hour with your banker for a slow month.
- Bring last year's statements, year-to-date numbers, your debt schedule, your weekly scorecard and next season's plan.
- Ask the questions in the table that fit your business and write down the answers.
- Read every covenant in your current loans and put each test date on the calendar.
- Leave with one request on the table: a seasonal payment schedule, a lien or guarantee release, a refinance of higher-cost debt or, if you carry no debt, dual approval and alerts on your accounts.
Log it: Annual bank review held.
Common questions
What is a loan covenant?
A promise in the loan agreement, such as keeping your DSCR above a set number or sending statements by a deadline. Miss one and the bank may be able to freeze or call the loan, even if every payment was on time.
Can I get out of a personal guarantee?
Ask what it would take. Owners of 20% or more usually guarantee SBA loans, and many banks ask for guarantees too. If the bank agrees to release or limit one, get it in writing.
Is business money over $250,000 insured?
Deposit insurance covers $250,000 per depositor, per insured bank, per ownership category. Ask whether your bank uses a reciprocal deposit network, which places pieces of a large balance at other banks so each piece stays within the limit.
Watch out for
- A line of credit that never gets back to zero. That usually means it's covering losses, not timing.
- Covenants nobody read until the bank called.
- New guarantees signed on old terms without asking what's changed.
- Moving your banking for a lower rate before you've read the new bank's covenants and pay-down rules.
Free help
- America's SBDC: free one-on-one business consulting. Find your SBDC
- SCORE: free mentoring from experienced business owners. score.org
- SBA: Lender Match connects you with SBA lenders
- Treasury CDFI Fund: community development lenders, mission lenders that include some banks, credit unions and loan funds
- FDIC: Understanding deposit insurance
Members: tools for this Move (after sign-in)
For National Pavement Maintenance Contractors Association (NPMCA) members:
- Business banking: /member-resources/business-banking
- Bank best practices: /member-resources/bank-best-practices
NPMCA may be paid by partners listed here. The lesson above is the same either way.
Free practice
Lesson check
5 questions on this lesson, one at a time, with the answer and the reason after each. Pass with 4 right, including every must-know question.
This is general education, not tax, legal, investment or insurance advice. Rules change and every situation is different. Check the sources below, and talk to a qualified professional before you act on it.
Sources
- PNC (one bank's guide): Business lending guide
- Chase: What is the debt service coverage ratio?
- Ameris Equipment Finance: Small business loans FAQ
- AICPA & CIMA: What is the difference among a compilation, review and audit?
- FDIC: Understanding deposit insurance; Reciprocal deposits final rule (2018)
- NAGGL: SBA SOP 50 10 8.1 update (owner guarantees)
- SBA: Lender Match; Treasury: CDFI Fund FAQ
- Ramsey Solutions: 7 Tips for How to Run a Business Debt-Free
- America's SBDC: Find your SBDC; SCORE: score.org
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