Financing the Shop Floor: Q&A with a Former Bank President
Throughput Show Episode 12 featuring John Key (originally aired 11/21/2025)
Welcome to Episode 12 of the Throughput Show. Today I’m talking with John Key, a former bank president who has spent decades lending to manufacturers. John brings an unusually clear and transparent perspective on what banks actually look for, how owners should prepare for loans, and what separates financially strong companies from vulnerable ones. Our conversation dives into equipment financing, lines of credit, covenants, regulation, and the relationship side of borrowing that most shop owners never fully understand.
1. The Purpose of a Line of Credit Is Not What Most Owners Think
John opened by explaining that a line of credit is not meant to finance long-term assets. A LOC is designed to support the cash cycle of the business—covering short-term needs like payroll, material, and timing gaps between receivables and payables. When owners use a LOC to buy equipment, they’re mismatching financing and creating unnecessary strain.
Any asset that will last multiple years should be financed over multiple years. Any expenditure that turns quickly—like labor and materials—belongs on a LOC.
2. Regulations Have Made Lending Slower and More Conservative
John shared how banking has changed post-2008 and post-COVID. Regulations now require far more documentation and slower processes, even when the bank wants to lend. Many owners assume the bank is dragging its feet for no reason; in reality, lenders are operating under strict scrutiny that forces them into more conservative timelines and tighter controls.
The practical takeaway: start conversations early. If you wait until the cash or equipment need is urgent, the bank may not be able to move fast enough.
3. Why Banks Care So Much About Cash Flow and Collateral
Banks lend against predictability. They want to know three things:
Will cash flow cover the debt?
If not, is there collateral to protect the bank?
Is the owner stable and competent enough to manage adversity?
John explained that consistent cash flow is the strongest indicator of repayment. Collateral is simply the fallback. A shop with strong EBITDA, clean financial statements, and solid processes will get better terms from every lender.
Weak bookkeeping or irregular reporting sends a signal of instability. Banks don’t need perfection—but they need clarity.
4. Equipment Financing: What Banks Want to See
When financing machines, the bank evaluates:
Useful life of the equipment
Expected productivity and revenue impact
Secondary market value
Whether the term of the loan matches the expected benefit
John emphasized that financing should match asset life. A seven-year machine should not be financed on a three-year note unless the company wants to aggressively deleverage. Mismatched structures are one of the most common financial mistakes he sees owners make.
He also shared that banks love recurring, sticky revenue tied to a machine—multi-year contracts, stable programs, or long-term customer relationships give lenders confidence that the equipment will generate predictable return.
5. Covenants Are Not Punishments—They Are Early Warning Systems
Many owners treat covenants like traps. John reframed them as communication tools. Covenants give lenders early signals when profitability, leverage, or cash reserves are drifting into risky territory. This helps the bank work with the borrower before problems become unfixable.
Healthy companies rarely trip covenants. When they do, it’s almost always because something meaningful changed in the business—and early visibility gives both sides a chance to act before the problem compounds.
6. The Power of the Banking Relationship
One of John’s strongest messages was about relationships. Bankers lend more comfortably to owners who communicate proactively, share accurate financials, and ask questions early. Surprises erode trust.
Owners who treat their banker as a strategic partner—not a necessary evil—tend to receive far more flexibility when they need it. A banker who understands your business, your character, and your track record will go to bat for you inside the credit committee.
7. SBA Loans: When They Make Sense
SBA programs exist for owners who are strong operators but lack collateral or long operating history. They are slower and more paperwork-heavy, but they allow banks to extend credit that traditional underwriting might decline.
SBA loans make sense when:
You are expanding aggressively and need additional support
You are acquiring a business with limited collateral
You are financing goodwill, customer lists, or other intangible assets
The tradeoff is speed and documentation, but for many manufacturing owners, SBA financing is a highly effective bridge to bankability.
8. What Owners Should Do Before Applying for Financing
John offered a simple checklist:
Have clean financial statements
Know your cash flow trends
Show historical performance and realistic projections
Match financing structure to purpose
Communicate early about needs
Inside the transcript, he mentioned that owners often come to the bank only when things are already urgent. That compresses the bank’s ability to underwrite and increases stress for everyone involved. Starting early gives owners far more flexibility.
Key Takeaways / Best Practices
Use lines of credit for working capital, not equipment.
Match loan terms to asset life.
Clean bookkeeping increases lender confidence.
Banks care most about consistent cash flow.
Covenants exist to protect borrowers, not punish them.
Start financing conversations early, not urgently.
SBA loans are slow but powerful when collateral is thin.
Strong banking relationships create flexibility during downturns.
Q&A From the Episode
Q1: How should owners think about lines of credit versus equipment loans?
A: A LOC is for short-term needs—payroll, materials, timing gaps. Equipment should be financed over the life of the asset to avoid cash strain.
Q2: Why does it take banks so long to approve loans today?
A: Regulations require banks to follow slower, more conservative processes. It is not hesitation—it is compliance. Start early so regulatory timing doesn’t become a roadblock.
Q3: What matters more—collateral or cash flow?
A: Cash flow. Collateral is secondary protection. Predictable cash flow is the primary driver of loan approval and terms.
Q4: How should owners navigate covenant conversations?
A: Treat covenants as a monitoring system. When something slips, the bank can work with you early before the situation becomes severe. Transparency builds trust.
Q5: When is an SBA loan the right move?
A: When you need financing that outstrips your collateral or operating history. SBA loans let banks lend into situations traditional underwriting can’t support.