Commercial bank lending is based on risk. The higher the risk the business poses to the lender, the harder it will be to borrow. The following tips are designed to help you present your best case to a commercial lender and increase the chances of getting the loan your business needs.
1. Evaluate the business – In commercial lending there are specific criteria by which your lender will evaluate your business and intangibles that may apply. View your business through the Lender’s eyes. Know your credit score, is your business profitable, are your customers paying on time, do you have a good reputation in the community? Google your business, see what others are saying about you. This will be one of the first things your lender will do when they start working on your loan request.
2. Repair any deficiencies you can — Knowing what the lender expects and knowing where your business might be lacking will help you repair these deficiencies before applying for a business loan. Explain any seasonality in your business, improve your receivables management, and ensure there are no mistakes on your business and personal credit report.
3. Make sure financial statements are in order – Make sure your financial statements are complete, correct, and in order. Include a balance sheet and income statement. Consider having your accountant review your financial statement to anticipate any issues a lender may raise. Understand what your financial statements say about your company. No one expects you to be an accountant, but you should be able to explain any significant fluctuations in revenues and expenses.
4. Be prepared to specify how much you want to borrow and what you will use the proceeds for – Will the loan be used to purchase new equipment or capital expenditures? Expansion or hiring? Increase in inventory? Expansion into a new facility? The lender is required by regulation to ensure that loan proceeds are being used for legal purposes, that’s why they are so nosey!
5. Develop a concise business plan – Develop a plan that clearly illustrates where your business is now and how a new loan will benefit your business. Discuss strategy, goals, and tactics. Provide background on management, both owners and non-owners, if applicable. Discuss your competition, marketing plans, regulatory barriers, and cash flow projections.
6. Be prepared to put your own money in and to personally guarantee the loan – Lenders want to share the risk, not own it entirely. If you are expanding into a new facility, purchasing equipment, or starting a new business, you will need to have some of your own cash into the project. If you are not willing to invest in your business, why should the bank? Anyone who owns 20% or more of the business will be required to personally guarantee the loan. Make sure all owners/partners are prepared before applying for a loan.
7. CASH FLOW not REVENUE is KING! – A business owner often looks at revenue when discussing how much the business is “making”. In commercial lending the focus is on the cash available to service the debt (cash flow). For instance if your business has $1MM in revenue but is paying out $950,000 in costs and expenses the cash flow is $50,000 not $1MM……………..BIG difference!
8. Speaking of…do not try to “hide” your businesses success at tax time – Business owners can often encourage their tax prepares to include as many deductions as possible to reduce their tax liability, but that can come back to haunt a business owner. As a business owner you should discuss with your accountant the implication of the way you file your tax returns. It may save you a few bucks in taxes but also may prevent you from obtaining a loan in the future.
There are more lenders than ever before willing to lend to small businesses and many lenders can be found with a simple online search, but do your research. Some lenders (such as online or peer to peer) may be a quick easy fix but can also cost substantially more than working with a lender in your market.