Bank lending has really been tight over the last few years. Most business owners now think that the only word their banker can say is “no.”
The reason: This last financial crisis has changed the lending game. Banks and other lenders will not just provide you a business loan because you have a great smile or a novel idea. You have to get in there, roll up your sleeves and really entice them to lend to your business – make them approve you!
Know that when lenders do begin to approve more loans again, the flow of new business loan applications will really flood in. Thus, to ensure that your loan application gets funded, you have to find ways to get your business noticed – making it not only stand out but stand above all the rest.
Here are a few tips to get your business loan application moved to the top of the pile:
Pick the right bank or lender: Not all lenders will emerge from this financial mess in the same position they went into it. Some will have changed their entire lending philosophy. Some will no longer loan to small or mid-sized businesses – focusing only top tier/low risk companies. Some will only provide loans based on companies in certain industries or that have specific collateral. And, some may be out of the business lending arena altogether. So, start with your current bank or past lender and see if or what they have changed in regards to their business loan policies.
Further, all banks and lenders have changed their loan approval criteria. This was not done to hinder businesses from seeking loans but more from the threat of new governmental regulations. Thus, if your business was able to get a business loan or working capital line of credit prior to the financial meltdown – that does not mean that it will qualify for one today or even tomorrow with the same bank or lender.
Collateral and Guarantees: Banks are now more focused on repayment and not just one form of repayment but several. Banks and other lenders always look to current positive cash flow as the first source of repayment. But, that is no longer enough. What happens if you have a slow month or if the economy tanks again? Lenders will start looking for additional (complementary) forms of repayment from sources like personal guarantees or large amounts of and/or highly valued collateral.
Collateral will be key in this new lending market. If you are serious about your business’s future prospects, then you should have no problem putting up collateral against a business loan request. Not only does collateral provide your lender with an additional source of repayment but could really show your banker or loan officer that your business is serious – essentially helping you close the deal.
Keep in mind that different collateral has different value. Banks and other lenders don’t look at how much you paid for a piece of equipment or a piece of property. They look at its value as how fast they can sell it at fire sale prices to recoup their losses.
The best collateral – where your business would get the best value against a loan – is collateral that has high liquidity – like accounts receivables, investments, purchase orders or even personal liquid assets of the business owner or of the management team.
Make sure your business loan application clearly states what collateral and/or guarantees you or your business is willing to provide as well as its current, conservative market value. Providing this information up front will demonstrate to your lender that you are here not to fight with them over this hotly contested issue but are willing to play within their rules. Plus, banks like easy deals and deals with tons of collateral are usually the easiest to get approved.
Remember, if you don’t show and won’t demonstrate that you are serious about your business and that you have not taken the time to understand your lender’s collateral or guarantee policy, then your banker or lenders will treat you the same way and move your application to a bottom drawer or the round file in the corner.
A Clear Story: Make sure that your loan application tells your story. Not just what your company does but also why it does what it does, who (your customer segment) it targets and satisfies, how its current management can build value in the future (based on what it has done in the past) and what the funds will be used for – specifically. Putting in your business loan application that you will use those funds for general business purposes just will not fly any more. Banks and other lenders want to be repaid and must be satisfied that you and your business will deploy this new asserts (the loan funds) in such a way to generate enough new revenue to pay back the loan and interest as well as grow your company.
Financial Statement and Tax Returns: Banker and lenders will not just take your word for your financial condition or be satisfied with a quick printout from your accounting program. Stated income loans are a thing of the past. Lenders will be looking for both audited financial statements and/or completed and filed tax returns – at least 3 to 5 years worth. These financial statements not only provide additional information to help your lender make their decisions but can really validate your business’s potential; both of which will further your ability to receive that sought after approval.
Further, many lenders today will contact both your customers and suppliers to back up some of the information provided in your financial statements. While this may seem like a huge hassle – it is just the way the game is played now. If you go into this process knowing what financial documentation is required and planning for it (also taking to your customers and suppliers before hand) then the burden will be lessened on both you and your loan officer.
Forecasts: Combined with financial statements and tax returns, your loan application should include well-formulated financial forecasts. Not only will this show the strength of your management ability to direct the company moving forward but forecasts (if done properly with a best-case, worse-case and most likely-case scenarios) can help your lender determine if your business will still be able to repay their loan under different market conditions. Additionally, these forecasts should show most likely scenarios both with and without the loan proceeds.
As always, tie your forecast to your expected loan term and make sure that all numbers trend with past results – if not, make sure you have a detail explanation of why.
Network: Lastly, do your homework on who your bank or lender has worked with in the past. Most banks or financial companies have their core customers – those businesses that can just pick up the phone and get whatever they want. If your business can receive references or introduction from them – that is likely to put you over the top and get potential lenders knocking on your door.
If that is not possible, look to those who you have dealt with in the past (like other lenders or suppliers) or to those who provide your business revenue (like customers) for references. These groups will show your lender that they will continue to support your business in the future – making you a better candidate for a business loan.
The bottom line here is that if your business really needs outside capital to grow then make sure that you put the same intensity into your business loan application as you do into your business. Walking into your bank and asking for a business loan is much different than walking into your butcher and asking for the cut of the day.
Not getting what you want from your butcher may disappoint you but not getting what you need from your banker or lender could destroy you.
As we emerge into this new economy, you as a business owner, must understand that business lending has changed and if your business needs outside capital to prosper and grow then you must make sure that you have a well prepared business loan application before you even consider walking into your lender’s office.
Joseph Lizio is an entrepreneur and MBA. His focus is helping businesses obtain capital. His current endeavor is Business Money Today. You can learn more about Business Loans.