The days of walking into a bank branch, answering a few questions about your business, and be notified within 24 hours of a loan decision are gone.
Bankers are under pressure to analyze each business loan in detail and evaluate the risk of both the business and the owners in a rigorous and comprehensive manner.
During the height of irresponsible lending, bankers were “selling” loans, with more focus on getting the deal closed than understanding the nature of the request.
The pendulum has now swung the other direction. As the small business owner, you must “sell” your business and its capability to repay the loan to the bank. Banks are declining loans even for well established and profitable companies.
For this reason, it is important that you prepare. Following these steps will not guarantee approval, but it should guaranty you the respect and the full consideration of your loan officer:
1. Find a competent banker:
While not all banks are the same, they do have similar credit policies, and your best ally is a banker who understands your business and believes in your creditworthiness.
If you do not already have a strong relationship with a bank, ask other businesses in a similar industry for a referral. If you are a member of a Chamber of Commerce or networking group, ask someone for a referral.
Ask the banker if he or she has worked with companies in your industry before. If he or she does not ask you any specific and detailed questions about your business, this is a good indication that he or she either has no interest in your business or he or she is inexperienced.
2. Have a full financial package ready:
You do not have to submit your financials to every banker you meet with, but the fact that you have a full package prepared in a professional format is an indication of your character, one of the C’s of credit.
A full financial package should include at least the past two years tax returns for both the company and the owners, current year to the date income statement and balance sheet, a personal financial statement, and any other relevant information such as an equipment invoice accounts receivable aging report, or a contractor’s estimate.
3. Be prepared personally:
In today’s credit environment, a personal guaranty of any significant owners (usually any owner of more than 20%) is practically a non-negotiable part of any loan application.
In addition to a personal guaranty, the bank may ask to secure a loan with any equity you have in your home.
While your ability to avoid this will depend on the strength of your business, be prepared for it to come up in a discussion with the bank. Also, try to pay down any personal revolving debt including home equity lines of credit and credit cards.
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4. Know your credit scores:
As the owner of the business, you should get your FICO score prior to applying for any loan. If your score is less than 700, or you have any defaults, collections, etc., be prepared to explain your situation.
If your personal credit score is less than 650, it will be extremely difficult to get your loan approved and you should work on improving your credit prior to the application if possible.
Most people are unaware that their business has a credit rating also.
Many banks use Dun & Bradstreet for their small business credit report or Equifax for their Small Business Financial Exchange (SBFE) score. If possible, check the accuracy of this information prior to your application and address any weaknesses in your business credit.
5. Bring it all to the table:
Banks make money in myriad ways. If you make it clear to your bank that you intend on building a long term relationship, they will be more inclined to take a second look at your loan.
Let your banker know that if he or she can come back to you with an approval and favorable terms, then you will be prepared to provide them additional business including any business or personal deposit accounts at other banks, merchant services (credit card processing), payroll services, and best of all – referrals to other businesses in the area.
6. Understand that cash is king:
While it is important to have collateral, good credit scores, personal net worth, profitability, and a good balance sheet, the first qualification for any small business loan is satisfactory cash flow. Banks have their own formula for Debt Service Coverage.
This basically means that you have enough cash coming in based upon your history to pay back any existing obligations plus the new loan.
Banks not only want you to have enough cash, but they want you to have extra cash. Cash is often called the blood of the business and it will also make or break any loan request, regardless of the other factors.
There are many other factors that may affect your application for a business loan such as industry, time in business, and the specific nature of the request. These six steps are not comprehensive, but you can at least feel confident that your bank will take you seriously.
These are difficult times for small businesses trying to obtain financing and even some of the best businesses will receive a decline for a loan. If you are prepared, your banker may be willing to go the extra mile for you in getting an approval or reconsideration.