Busting 5 Myths About Small Business Lending

by with No Comment Helpful Articles & Tips
JARED HECHT
CONTRIBUTOR
Co-founder and CEO, Fundera

AUGUST 31, 2015

Like your mother and your high school history teacher likely told you over and over again, you can’t believe everything you read on the Internet.

With the growing accessibility of information freely available online, modern entrepreneurs in search of funding to grow their businesses have a huge leg up on generations past. Yet for every bit of accurate and genuinely helpful advice, there is an increasing prevalence of misinformation and myths surrounding the small business lending space. Unfortunately, much of that misinformation can give business owners bad information about how small business loans work, giving them a false sense of their own eligibility.

Don’t miss out on opportunities to secure funding for your business due to false information. Let’s separate fact from fiction and bust five of the most common small business lending myths we hear every day.

1. Approval takes forever.

Whether you’re itching to move forward with a new business idea or you need cash quickly to cover an unexpected expense, one of the most common questions business owners have when applying for funding is, “how fast can I get cash in hand?”

You may hear from well-meaning friends and relatives that getting approved for a business loan can take weeks or even months, but that information is outdated. With new online loan applications, an organized business owner can complete her application in less than an hour, and it can be reviewed and approved within 24 hours of submission. Many lenders can even offer cash in hand in as little as two days.

While some borrowers may take additional time to gather financial statements or get their credit reports in better shape, once you hit “submit,” the approval practice is very efficient. Don’t let the fear of a long approval process hold you back from seeking a loan.

2. New businesses never qualify.

The startup funding quandary is a difficult one. You need an established business to secure funding, but you need cash in hand to get your business off the ground. Seeking funding from venture capitalists or angel investors is certainly the most popular route for securing startup funding, but is it the only way?

Many startup entrepreneurs assume that they need to be in business for a few years and have established business credit before they can qualify for a loan. However, more and more lenders are specifically offering startup loans that require little or no business credit history to qualify.

Applying for a startup loan will involve more scrutiny into your personal finances than other types of business loans. Your personal credit score will be the most important part of the application. You may also be faced with less favorable rates than you would receive as an established business. But if you’re committed to finding funding and open to the necessary conditions, securing a loan for your brand new business is possible.

3. Online lenders are con artists with unreasonable rates.

We get it. The online alternative lending market is relatively new, and people are skeptical of new things. Unfortunately, many unscrupulous online lenders and brokers have engaged in predatory and dangerous lending practices, giving the entire industry a bad rap.

But in reality, some alternative lenders operating online offer single-digit interest rates. Those offering higher rates often are working with borrowers who are considered risky. Online lenders regularly consider a wide variety of borrower credentials outside of just the traditional credit report and score. Business owners who were turned down by their bank can frequently find the funding they need online.

As with any financial transaction, it’s critical that business owners do their due diligence about an online lender before signing the dotted line.

4. Loan officers only care about your credit score.

This myth, carried over from the outdated traditional bank model for loan approvals, can leave business owners with less-than-stellar credit feeling hopeless about their funding prospects. Luckily for these entrepreneurs, growth in the alternative lending sector has led to a larger spectrum of factors being considered in the loan approval process.

Many lenders will now give equal weight to your company’s revenue history, cash flow statement and other financial documents in determining your loan eligibility. This information often paints a very different picture of a business and its owner’s financial standing than what a credit score alone can convey.

Even so, before applying for a business loan, it is still important that you take steps to make your credit report and score the best possible reflection of your financial history. Always make debt payments on time, and manage your credit usage responsibly. Also frequently check your credit reports for accuracy. If you find errors, contact the reporting agencies to correct the mistakes.

5. Approval is determined by a heartless algorithm.

Once upon a time, entrepreneurs seeking small business funding could walk into their local community bank, build face-to-face relationships with managers and loan officers, and be confident they understood the whole picture behind their loan application, including both cold hard numbers as well as the more intangible elements of their qualifications as borrowers.

These days, technology has all but replaced those in-person banking relationships, creating the impression that loan approval decisions are controlled by nothing more than a few concrete variables and an algorithm saying “yes” or “no.”

But while you may have lost the ability to look your loan officer in the eye and strike a deal with a handshake, the modern funding process isn’t actually as impersonal as this reputation suggests. In reality, lenders consider a wide variety of both objective, number-based factors as well as more subjective considerations, like your business and marketing plan.

If you’re concerned about certain elements of your loan application, like your credit score, take the time to flesh out your business plan, fully explaining how the funds you are borrowing will be used and how this investment will lead to a successful business.

Ultimately, your lender’s main consideration is whether or not you will make your loan payments on time, every time. Your loan application should, both through financial documents and through your written statements, paint the best possible picture of your future ability to repay the loan.

If you do your research, stay organized, and can clearly and concisely convey this information to lenders through your loan application, your chances of being quickly matched with the a loan to meet your business needs is tremendously greater.

The benefits of making your banker a friend

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U.S. Small Business Administration

While every business has a bank, few have a banker.  That’s because bankers are too often seen as obstacles standing between an entrepreneur and the bank’s vault.

“You don’t do business with an institution.  You do business with people.  When you get a banker who believes in you, you can accomplish incredible things,” counsels Debbi Fields, founder and chair of the board of Mrs. Fields Cookies.

The banker is the loan officer or office manager who handles your account.  A good relationship with that person can bring you money in the form of credit, save you money in fees and enhance your business opportunities through taking advantage of the banker’s extensive personal contacts.

Relations between bankers and business owners take on as many hues and shapes as relationships between husbands and wives, but the best ones all have trust and honest communication in common.  “Ideally, it’s a human relationship as well as a business relationship,” says Bill Byrne, an entrepreneur and author of Habits of Wealth.

Why Have A Relationship?

Better access to credit is one of many benefits garnered by those with good banker relations.  The biggest intangible in any loan request is the person who is asking for the money, notes Mitch Hurly, vice president and manager at First Security Bank of Utah.  The more secure a banker feels about a borrower’s integrity, the better the chances for loan approval.  A strong, trusting relationship helps give a banker that important sense of security.

Because credit is more than just loans, good banker relationships can also result in performance bonds, letters of credit and credit lines being granted, say several business owners.

Tom Rose, co-owner of Marietta Industrial Enterprises Inc., a warehousing and transportation company inMarietta, Ohio, estimates he shaves 30 to 60 days off transactions such as getting loans or credit line extensions because of the close relationship established with his banker.  When a deal’s window of opportunity is narrow, a quick bank approval can make the difference between getting the deal or losing it.

Bankers can also provide introductions to potential customers, suppliers, employees and investors because of their many connections in the community.  Only a strong relationship with the business owner earns such personal introductions, however.

“If bankers say nice things about us, it’s a tremendous reference,” emphasizes Sidney Green, president and chief executive officer of Terra Tek, an environmental services firm in Salt Lake City.  He’s worked with the same bank since 1970, and his employees have benefited as well when they needed services such as auto loans and home mortgages.

“My banker provides me with a lot of support and insights.  I have a much higher comfort level, and that’s worth a great deal to me,” says Suzanne Edgar, president of Columbus, Ohio-based Epro Inc., a floor tile manufacturer, citing an important advantage of the relationship — peace of mind.

Notes Paul Sharfin, president of M&P Construction Company Inc., in Blacklick, Ohio:  “A banker is similar to your barber.  You keep going to the same barber because you’re comfortable with him, he takes care of you and he does a little bit extra.”

Poor Relations Are Common

If banker relationships can be so beneficial, why do so many business owners suffer through poor ones, or cultivate none at all?  Often, the problem is that entrepreneurs don’t understand the restraints and needs of bankers.  Think of capital as a food chain, suggests Raymond Smilor, vice president of the Center for Entrepreneurial Leadership, Kauffman Foundation, in Kansas City, Missouri.  Early in the food chain, capital should come from private investors such as family and friends.  Later, professional investors such as venture capitalists can be tapped.  Only when the business has solid assets and a steady track record is it ready for a banker.  Smilor says that owners of emerging businesses often struggle with their bankers because they ask for too much, given the immaturity of their companies.

Bankers, by law and temperament, are not investors.  Risk and reward typically have a direct relationship — the higher the risk, the higher the reward.  Investors decide to put money into an enterprise without guarantees they will get their money back, let alone a return, because the rewards can be large if the business succeeds.  However, lenders such as banks don’t have the same lucrative potential.  Even if the money lent is the catalyst for putting a firm on the fast track to success, the most the banker can expect to get back is the capital (plus interest) in timely payments.  That is one reason why bankers and entrepreneurs so often clash.  The entrepreneur asks the banker to take investor risk, while the banker’s position is that he can only take credit risk because of the limited potential payoff.  Until the banker and entrepreneur speak on the same wavelength, and understand each other’s vantage point, a good relationship can’t exist.

Communication — or lack of — is probably the greatest area of weakness between entrepreneurs and bankers.  When the news is bad, owners tend to shut down lines of communication, thinking the banker will be upset.  While the banker may understandably be concerned, his reaction will be far less negative than if he is not told what is going on.  Nothing upsets a banker more than surprises.

Not all weaknesses rest with the business owner, however.   Bankers change jobs more frequently than politicians stereotypically change their minds, so many may be unfamiliar with their customers and wary of extending credit even when the company is deserving.

Relationships, whether personal or business, are always challenging.  But there are certain things an entrepreneur can do to help create a climate that is conducive to fostering a productive, long-lasting relationship with a banker.

Creating a Good Relationship

Clear, frequent, open lines of communication are a necessary component of a strong business owner-banker relationship.  Owners and bankers should communicate at least quarterly, urges Dave Brown, senior vice president at Key Bank in Utah, who speaks to some clients every week.  Bankers usually require quarterly financials, with a major review once a year.  If a loan is based on inventory or accounts receivable, monthly financials may be needed.

There is more involved in communication than mailing out financials, however.  Invite your banker to tour your facilities, recommends Scott Clark, author of Unleashing the Hidden Power of Your Growing Business. And, he warns, don’t extend the invitation just before you ask for a loan as that will arouse suspicion.

Be sure to call your banker when something important occurs, such as gaining a major account — or a major competitor.

Put your comments down in writing to provide ammunition in case the banker’s boss questions why something happened.  It’s also valuable in the event your banker moves on, as the replacement can quickly become familiar with your situation if your file is complete and up-to-date.

Identical to any relationship based on trust, this one requires time.  Paul D. Brawner likens it to a winning football team that relies on its running game.  “A relationship is like three yards and a cloud of dust,” he says about the strategy that slowly but eventually results in a touchdown.  “A banking relationship needs to be nurtured day in and day out, not once a year.”  Brawner is senior vice president of Huntington National Bank in Columbus, Ohio, and former chair of the American Banker’s Association Small Business Unit.

The adage “it’s better to give than to receive” is true with a banking relationship.  Don’t ask for favors at the beginning.  First give the bank your business and even try to bring in other accounts, which will create good will you can capitalize on later.

Don’t Tell Them Everything

The banker can be a friend, ally and consultant, but not someone in whom you necessarily confide, specifically about things that don’t directly affect the banker’s interests.  If your marriage goes on the rocks, for example, don’t rush to tell your banker.  And if something bad happens in your business, try to determine the cause and develop a plan for remedying the situation before talking to your banker.

No business or business owner is perfect, so it’s unrealistic for a banker to want to know everything that is happening.  “We all have acne in a corporate sense.  The banker doesn’t need to be our business confessor,” Bill Byrne notes.

Finding a Banker

Pivotal to establishing a good banker relationship is finding the right banker.  First, look at a bank’s financials.  A troubled or insolvent bank isn’t going to do you much good no matter how carefully you nurture a relationship with one of its bankers.  Deal with officers as high up in the organization as possible, since upper management tends not to change jobs as frequently as lower-level employees.

Many small- and medium-sized banks cater specifically to small businesses, while some larger institutions have small business divisions.  These banks tend to have bankers who are tuned into small business issues, exactly the type of banker you want.

Just as you wouldn’t hire the first applicant you interview for a secretarial position, why select the first banker you speak to?  Interview several.  Elizabeth Bradshaw, president of Ginny’s Printing and Copying inAustin, Texas, says her favorite banker has “a great bedside manner.”  The emotional component in a relationship makes it important to find a banker with whom you are comfortable.

When you have established and nurtured a good relationship with a banker, you can count on a brighter future for your business.

What a Banker Wants To Know

To maintain a good relationship with a banker, you must demonstrate professionalism and competence, says Henry W. Gardner, vice president at Bank One in Salt Lake City, Utah.

According to Gardner, when a business owner asks for a loan, this is what a banker wants to know:

  • How much money do you want to borrow?
  • Why do you want the money, and how will it be used?
  • What is the primary source that will generate the funds to repay the loan, such as selling a building, selling inventory or increased business?
  • What is the secondary source of repayment, such as liquidation of equipment, or injection of additional capital by the firm’s principal?
  • How will the loan be secured (collateral)?
  • Who will guarantee the loan?  (The owner should be taking more risk than the banker.)

The 3 T’s of a Good Banking Relationship

Nearly everyone looking for a loan learns the “five C’s of credit,” which are: character (how trustworthy you are), capacity (your financial strength), capital (the amount of your own money invested in the business), collateral (assets available to back up the loan) and conditions (the state of the economy and your industry.

Mitch Hurley, vice president and manager at First Security Bank of Utah, says that in addition to the five Cs, banking relationships are built on the “three Ts”:

  • Talk: For a relationship to thrive, the business owner needs to talk — communicate — regularly with the banker.  And the talk must be frank and open, even when reporting a negative development.
  • Time: A relationship takes time to grow.  Don’t rush it, and don’t expect it to bear fruit immediately. Like friendships, a good banker relationship will age well over the course of its duration.
  • Trust: With honest, frequent communication and time, trust develops, which is “the foundation of the relationship,” emphasizes Hurley.  When trust exists on both sides, the relationship has the crucial component to make it a lasting one.

How to Speak Bank

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How To Speak Bank

by Paul Long- 2013

Do you ever feel like to need a finance degree to understand some of the terminology when you apply for a business bank loan? A good banker will always help guide you through the process and ensure you understand the language.

The following are some financial terms which are used during the course of analysis of financial statements pertaining to any borrower while lending:

  1. Cost of production: This refers to consumption of raw materials (including stores) and spares, power and fuel, direct labor, repairs and maintenance, other manufacturing expenses plus opening balance of stock in process minus closing balance of stock in process.
  2. Cost of sales: Cost of production as mentioned above plus opening stock of finished goods less closing stock of finished goods.
  3. Operating profit: Net sales less cost of sales minus interest and selling, general and administrative expenses.
  4. Net profit before tax: Operating profit plus other income minus other expenses.
  5. Net profit after tax: Net profit before tax plus or minus deferred tax plus current tax.
  6. Retained profit: Net profit minus dividend paid/declared.
  7. Net sales: Gross sales minus excise duty and returns.
  8. Total current assets: Inventory, receivables (including bills discounted) and all other current assets which are cashable in next 12 months plus prepaid expenses.
  9. Total current liabilities: All liabilities which are payable in the next 12 months including term loan installments payable in next twelve months, if any.
  10. Net working capital: Total current assets less total current liabilities.
  11. Working capital gap: Total current assets less current liabilities other than bank borrowings.
  12. Total outside liabilities: Total liabilities as per balance sheet less net worth.
  13. Net worth: Capital Plus reserves plus surplus.
  14. Tangible net worth: Net worth less accumulated losses and intangible assets.
  15. Current ratio: Current assets/current liabilities.
  16. Current assets: Cash balance + bank balance + sundry debtors+ inventory + advance payment made to suppliers + advance paid for miscellaneous purposes
  17. Current liabilities: Bank overdraft + Sundry creditors + Provisions for income tax + provisions for any other expenses + advance payments received from the customers
  18. Quick ratio: Current assets less inventory/current liabilities less bank overdraft
  19. Debt equity ratio: Long term debt/tangible net worth
  20. Debt service coverage ratio: (Profit after tax + depreciation + interest on term loan)/(interest on term loan + installments on term loans)

Out of these 20, number 20 is the most important. The debt service coverage ratio is the most important in banking ratios because it says whether you are able to handle this debt that you are asking for (or the debt you currently have).

 

U. S. Small Business Administration Loan Funds Available to Purchase Commercial Real Estate

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by: Stephen Umberger, District Director

Small business owners thinking of purchasing or renovating commercial real estate or purchasing equipment to grow or expand their businesses should consider the U.S. Small Business Administration’s (SBA) 504 Loan Program. The 504 loan provides small businesses access to the same type of long-term, fixed-rate financing enjoyed by larger firms. Interest rates are equivalent to favorable bond market rates.

Most Maryland businesses would be eligible for this loan program. The 504 Loan Program defines a business as small if its net worth is under $7 million and net profits, after taxes, are under $2.5 million. Almost any type of legitimate business is eligible for 504 financing, including manufacturing, wholesale, service, professional service or retail.

A 504 loan may be used to purchase fixed assets such as: land and improvements, including owner-occupied buildings, grading, street improvements, utilities, parking lots and landscaping; construction of new facilities, or to modernize, renovate or convert existing facilities; or to purchase long-term machinery and equipment with a useful life of at least 10 years. Soft costs like architectural and legal fees, environmental studies, appraisals, and interest and fees on the construction and/or interim bank financing can also be rolled into the loan. Financing for other needs such as working capital, inventory, debt consolidation or refinancing are eligible through a separate SBA 7(a) Loan Guaranty Program.

A typical 504 project is structured with fifty percent of the project costs provided through a private-sector lender. This senior loan is usually for a 10-year term at a fixed or variable rate, depending on the relationship with the lender. Forty percent of the project costs are financed with a fixed-rate debenture secured with a junior lien from a SBA Certified Development Company (CDC). The debenture is backed by a 100 percent SBA-guaranty. And the final 10 percent of the project cost is provided by the purchaser.

The low 10 percent down payment is the big attraction of this program. It is possible to require even less from the business if a city, town or the state trying to attract businesses to their community is willing to provide a small piece of the financing in a subordinate position. Because of the lower down payment required and the ability to finance the soft costs, the small business will realize upfront cash savings of approximately $100,000 on a $1 million project.

The maximum SBA debenture can be up to $2 million. Certain manufacturing entities are eligible for up to a $4 million debenture. This means that a CDC can work with you to put together financing for a $10 million project with the bank providing a $5 million first mortgage with a SBA 504 debenture of $4 million, and only 10 percent equity.

Maturities of 10 or 20 years are available. Interest rates on 504 loans are pegged to an increment above the current market rate for five-year and ten-year U.S. Treasury issues. The rate on the 504 loan is fixed for the life of the loan and is set when the CDC sells the bond to fund the loan. Effective all-in rates, which include all fees and closing costs, on 20-year bonds vary monthly.

Consider the following advantages of the SBA 504 program versus conventional mortgage financing:

Advantages to the business:

  • Low down payment . In most cases, the company is required to inject just 10 percent of the total project cost, which includes renovations and soft costs. This allows the business to preserve cash for working capital. (Ordinarily, banks require a 20 to 30 percent down payment on the purchase price.)
  • Fixed rate on the SBA 504 portion. Small businesses don’t have to worry about the prime lending rate going up and can calculate the exact amount of their mortgage payments for 20 years.
  • Long term. 504 loans are for 10 or 20 years. Because the CDC is in second lien position, the lender doing the 50 percent first lien loan is willing to lend at a longer term. Longer terms reduce monthly payments
  • Low interest rate. Even with fees and closing costs included in the rate, the 504 program offers a low fixed rate for a subordinate mortgage loan. The blended rate between the lender portion and the SBA’s 504 portion makes the project very affordable, particularly for small businesses.

Advantages to the first mortgage lenders in a 504 project:

  • The lender has less risk because the SBA 504 loan is in second position
  • A lower loan to value ratio
  • The first mortgage lender gets CRA credits
  • Keep a growing customer happy

Advantages to the community:

The community gets the advantage of keeping or attracting a healthy, growing small business that will be creating jobs and contributing to the health of the local economy.

Tips from a Banker on Small Business Lending

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2015

In 2008, getting credit was difficult for small businesses and it held back the US economy. Now in 2015, the economy is getting better and banks are lending for real estate, equipment and working capital needs. There is no doubt that the economy is growing and small businesses are seeing increasing profits. Banks are recognizing this and are lending more money.

Below are some tips to assist small business in getting the loans they need and the banking partnerships that they deserve.

What do I need to apply for a loan? Make sure that you have access to your last 3 years personal and business tax returns as well as bank and brokerage statements. Also, banks will have you fill out a Personal Financial Statement asking you to list assets on one side and your liabilities on the other. If you are a startup or a business under 2 years old, have your business plan ready along with financial projections. This information will allow your banker to expedite the financing process and get you a decision quicker.

What is SBA Lending?  Many people believe that SBA is a pot of money that the government has to lend to Small Businesses, that isn’t the case. SBA does not make loans itself, but rather guarantees loans made by certain banks. In this way, taxpayer funds are only used in the event of borrower default. This reduces the risk to the lender, but not to the borrower. The role of SBA is to assist banks in helping businesses get loans that they may have not approved before. In most cases a the SBA can offer banks a 40% to 85% loan guarantee depending on the loan type and dollar amount. The bank is still taking a risk, therefore each bank and SBA have different underwriting criteria. It is best that you talk with your banker to see if an SBA loan is right for you.

What resources are out there to help? Good news! There are many resources out there that can assist you in building your business at any stage. Partners like Score (www.score.org) helps startup businesses with the business plan and start up financing. If you have been in business for at least 2 years the Small Business Development Center (SBDC) (www.wsbdc.org) is another great resource that specializes in taking your business to the next level. Best of all, these resources are of no cost.

Is your banker a consultant to your business? When you think of your small businesses “board of directors”, is your banker on that list? A good banker knows you and your business. They should understand your product/service and be a champion for you. A banker can help prevent you from making mistakes other small businesses have made in the past.

In turn, do you reach out and talk to your banker when you have a question, concern or are about to make a large financial decision? Your banker should be a resource not just when you need a loan or your line of credit is up for renewal.

Finding a qualified Banker– It is more important than ever that you have a banker that is willing to work with you. Each bank has different growth strategies and market segmentation. Smaller banks tend to be more small business friendly due to their community nature and willing to work with you not only on your loan request, but be willing to sit down with you and give advice for your future growth. Also make sure to interview your banker and make sure that they have knowledge of your industry and are used to working on loan amounts that you are requesting.

Most of all, if you have questions reach out to your banker. If you are not sure who your bankers is, that is a red flag. It might be time to think about switching to a bank that wants your business and is ready and able to be there for you when you call.

As Business Fraud increases, banks are looking for ways to help customers protect themselves.

by with No Comment Self Published Articles

2013

With a typical organization losing 5% of its revenue to fraud each year, it’s no wonder that Banks has created Treasury Management Products that protect business with fraud and ways to make payment to vendors and suppliers easier and more secure.

The number one method of fraud in businesses is internal fraud. We all know of that business that has had the trusty bookkeeper for 30 years and trusts them, however sometimes that bookkeeper may start a gambling habit that you don’t know about and can start skimming off the books. Owners need to protect themselves while allowing the bookkeeper to do their job.

FACT: Did you know that if a transaction clears your checking account (debt card, check etc.) you have 30 days to tell the bank of the unauthorized checks and 60 days for unauthorized electronic debits, otherwise you are stuck with the charge?

Positive Pay

One of the most common ways to protect your business account is with a service called Positive Pay. This service assists businesses in efficiently and accurately detecting fraudulent items presented against your accounts. Organizations implementing Positive Pay reduce their exposure to liability and benefit from the resulting time- and cost-savings.

With Positive Pay, we validate checks presented for payment on your account against a check record you provide BEFORE an item is processed for payment. If an item does not match it is flagged as an exception, and referred back to you for a payment decision prior to posting to the account, thereby giving you these additional benefits:

  • Minimize or eliminate check fraud to prevent losses;
  • Simplify month-end checking account reconciliation.

Zero-Balance Accounts

Another product that helps is what is called Zero-Balance Accounts. This product heightens your ability to effectively manage cash flow by linking multiple checking accounts and automatically concentrating excess funds into a single lead account. Use as a risk management tool to minimize complications if an account is compromised.

FACT: Did you know that 63% of small businesses that don’t have a bookkeeper ever check there bank statement until it’s too late to report fraud on the account.

Online ACH and Wire Transfers

Paying your employees, vendors and suppliers can not only be a hassle to keep track but issuing checks can be not only time consuming but your giving that person your bank account number. With ACH (Automated Clearing House) service you can send bank-to-bank credit or debit ACH transactions, pay employees via direct deposit, electronically debit customer accounts, and many other options, including:

  • Supports dual control protocols for the creation and import of ACH files;
  • ACH sub-users granted rights to either submit or approve ACH files;
  • Multi-factor authentication is required for ACH origination, providing you with an additional layer of online information security;
  • Assign sub-users specific access levels and monitor all activity anytime.

These are just some of the products that most banks offer to help business clients protect their money and make their lives a little easier. Check with your banker today if you can benefit from these.

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How to Borrow in tight times

by Self Published Articles

2013

When you sit down with a financial institution, here are some of the things banks are looking for and questions they will ask.

Financial presentation: Be prepared to provide three years of business and personal tax returns as well as a most recent personal financial statement, and up to date balance sheet and income statement

Line of credit: If you are looking for a line of credit, plan on providing accounts receivable, account payable agings, and an inventory listing.
Side note – A lot of customers immediately think of a line of credit when looking to grow or expand. Take a few moments to decide if a line of credit is right for you and what you are going to do with it. A good banker will encourage you to use your line for working capital and short term purchases. They are not designed as a long term tool to buy a piece of equipment, which is what loans are for. This is a common mistake that businesses make and can cause financial issues when it comes to renewal since most lines of credit have a short “resting” period that makes sure you are not “living” on your line of credit.

Cash Flow: Banks get paid from your cash flow, not from collateral (and remember cash flow and profits are not the same thing). You must have a clear and demonstrated source of cash flow repayment from your primary operations to apply for a traditional bank loan.  The bottom line is that the financial institution just wants to be paid back.

Collateral: This is required as a secondary source of repayment in the event your primary operation (creating cash flow) fails. If you are weak in collateral, there are government guaranteed programs that may assist in providing a bank sufficient collateral to support your loan request, such as the Small Business Administration, and there is money out there to lend.

Capital: You need to have sufficient equity in your company. The capital level required differs from industry to industry and according to your size. You should know how leveraged you are in relation to your peers and what sufficient capital levels should be.

Character: Banks need to understand you and the story of the business. Has your company been profitable or have fallen on hard times? (…who hasn’t!) What is important for banks to see is what you did during those hard times? Other things banks look for is your 5 year plan and what your credit looks like.

Some say they hear that banks are not lending money. That is true and false. There are some banks that are going through hard times (like all businesses) and are not able to lend. However, the mass majority of institutions do have good capital levels and are able to lend at favorable rates.

*Some information was obtained from Puget Sound Business Journal February 2012. Every bank is different in their lending approach; make sure you talk to your banker for more information.