Mar 13th 2013
By Mary Ellen Biery, Research Specialist, Sageworks
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Applying for a business loan can be intimidating and stressful, and it can be confusing to have an application rejected with little explanation. There are steps company executives can take to avoid some of the possible confusion and to develop a more positive experience while applying for a business loan. Three of these steps are described below, and your business clients should consider them prior to approaching a financial institution about a loan. By imparting these tips to your clients, you'll further cement your status as a trusted business advisor.
1. Research Lender Options
Like any business operator, financial institutions want to make money. While they want to lend money, they don't want to approve credit that will ultimately result in loss. Further, regulatory requirements often influence the types of loans that can be approved. As a result, a major concern of any institution considering approving a business loan is whether the owner and the business are good risks.
"Good risks," however, can mean different things to different lenders, which is why it's a good idea to do some basic research on the financial institution you're considering before walking in and applying for a loan. "Not every loan fits into every bank's wheelhouse, so you might be going for a business loan to a company that only does real estate," according to Shawn Frier, CPA, CFE, CMPE, a director and business advisor at accounting firm Freed Maxick. "You need to do your homework."
2. Articulate Needs and Repayment Plans
According to a recent Pepperdine study, banks and asset-based lenders only rarely cited a company's size or economic concerns as the reasons for declined loans. Instead, the top reasons were tied to the quality of the business's earnings or cash flow, or to the fact that the company had insufficient collateral.
More simply, the borrower didn't meet the lender's requirements.
Business owners and lenders often have mismatched expectations from the start, so it's good to ask a lot of questions to avoid confusion and additional problems. More importantly, lenders desire potential borrowers who approach the bank with a detailed plan for using the money and for repaying it.
"Be prepared," says Wells Fargo Senior Vice President David Booth, who is a business banking manager and the Cary, North Carolina, market president. "Have a clear vision of what you want." Your business clients should be able to articulate how much they need and why they need it.
Is the money for growth to buy a certain piece of equipment or to open a new facility in a neighboring town? Is it for working capital because they're behind on payments to vendors and they're about to get cut off, or is it because their sales have outpaced their ability to finance raw materials?
"We're not afraid to loan to businesses that can clearly demonstrate and articulate the plan – the plan for repaying the loan, for improving cash flow or whatever," says Mark Swanson, acting president and CEO of Northside Bank. "I'm not talking about a twenty-page binder. It can be a handwritten single page that says, 'Here's my problem, here's how you can help, and here's how I intend to repay it.' What I want to see as a banker is that you as a business owner understand your business, understand what has caused the problem to begin with, understand how you're going to fix that, understand how the bank can help, and how you intend to repay the loan."
3. Respond to Roadblocks (Potential and Real)
Knowing how a business stands on key financial metrics that predict default is important when a company is considering seeking a bank loan. Sometimes the evaluation process itself will allow a company to address potential roadblocks to a business loan.
For example, a company owner might recognize the need to identify additional collateral for a loan – stocks, bonds, or the owner's house. Or a business owner may decide that the timing probably isn't ideal to seek a business loan, Booth says. "If the person can kind of do their own homework, they may ask, 'Does it make sense to ask for this?'"
The owner may decide to work on extending payables or to offer a discount for faster payment on receivables in order to generate some additional cash flow that can make a credit request more attractive in a few months.
Checking credit history records ahead of time allows your client to address any mistakes or respond to any negatives. But a major way to face potential roadblocks successfully is to take time over the years to talk with their bankers – to ask questions and learn all you can about them, their processes, and changes in the lending environment. Cultivating a good relationship with a banker may help with many issues, Freed Maxick's Frier says.
Above all, he says, "Expect anything."
Mary Ellen Biery is a research specialist at Sageworks, a financial information company and provider of the Business Credit Report by Sageworks. She is a veteran financial reporter whose works have appeared in The Wall Street Journal and on Dow Jones Newswires, CNN.com, MarketWatch.com, CNBC.com, and other sites.