At some point, most small business owners will go to a bank or other lending institution to borrow money. Understanding what the lender wants and how to approach it correctly can mean the difference between getting a loan or not.
Understand the basics
form the bank
It is essential to present yourself as a reputable businessman, reliable enough to repay the borrowed money and to demonstrate that you understand the basic principles of banking. Your chances of receiving a loan will improve dramatically if you can see your proposal through the eyes of a banker and appreciate where it comes from.
Banks have a responsibility to government regulators, depositors and the community in which they reside. While the cautious prospect of a bank can be irritating to a small business owner, it is necessary to keep depositors’ money safe, banking regulators happy, and the economic health of the community.
Every bank is different
Banks differ in the types of financing they offer, interest rates charged, willingness to accept risk, staff expertise, services offered and their attitude towards small business loans.
Selecting a bank is essentially limited to your choices in the local community. Typically, banks outside of your area of business are not as keen on lending to your business due to the higher costs of credit checking and loan recovery in the event of default.
Also, a bank will generally not make commercial loans to businesses of any size unless a current account or money market account is maintained at that institution. Ultimately, your task is to find a business-focused bank that will provide the financial assistance, expertise, and services your business needs now and is likely to need in the future.
Make a report
Creating the right climate for applying for a loan should start long before funds are needed. The worst time to approach a new bank is when your business is in the throes of a financial crisis. Put the time and effort into building a base of information and goodwill with the bank you choose, and get to know the loan officer you’ll be dealing with early on.
Bankers are essentially prudent lenders with a primary concern for minimizing risk. Logic dictates that this is best achieved by limiting lending to businesses they know and trust.
One way to build relationships and build trust is to take out small loans, repay them on time, and meet all the requirements of the loan agreement in letter and spirit. By doing so, you will earn the trust and loyalty of the banker, who will consider your business a valued customer and make it easier for you to secure future financing.
Provide the information your banker needs to lend you money
Understanding what information a loan officer is looking for – and providing it – is the most effective approach to getting your loan. A solid loan proposal should contain information that develops the following points:
- What is the specific purpose of the loan?
- How much money do you need exactly?
- What is the exact source of loan repayment?
- What evidence is available to support assumptions that the expected source of reimbursement is reliable?
- What other source of reimbursement is available if management’s plans fail?
- What business or personal assets or both are available to secure the loan?
- What evidence is available to support the competence and capacity of the management team?
Even a brief review of these points suggests the need for you to do your homework before applying for a loan, as an experienced loan officer will ask probing questions about each one. Failure to anticipate these questions or provide unacceptable answers is damaging evidence that you may not fully understand the business or are unable to plan for your business needs.
Before applying for a loan, write a business plan. Your loan application must be based on and accompanied by a complete business plan. This document is the most important planning activity you can perform.
A business plan is more than a way to obtain financing. It’s the vehicle for reviewing, evaluating and planning all aspects of your business. Having a business plan proves to your banker that you are doing all the right things.
Once you’ve developed the plan, write a two-page summary. You will need it if you are asked to send a “quick summary”.
Next, have an accountant prepare historical financial statements. You cannot talk about the future without considering your past. Internally generated statements are fine, but your bank wants to know that an independent expert has verified the information.
Additionally, you need to understand your statement and explain how your operation operates and how your finances hold up to industry norms and standards.
It is also crucial to align the references. Your banker may want to talk to your suppliers, customers, potential partners or your team of professionals, among others. When a loan officer asks permission to contact references, respond promptly with names and numbers. Don’t let them wait a week.
Finally, it is important to seek advice from an experienced tax specialist and accountant. Walking into a bank and talking to a loan officer is stressful for almost everyone. Preparation and a thorough understanding of this assessment process is key to minimizing stressful variables and maximizing your potential to qualify for the funding you seek.
Norm Grill is Managing Partner of Grill & Partners, LLC, chartered public accountants and consultants to private businesses and high net worth individuals, with offices in Fairfield and Darien.