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The strategic aspects of business borrowing Setting the stage for a successful loan request begins long before you start compiling your application As important as the nuts and bolts of your commercial loan application are the strategic considerations that, properly addressed, make an attractive presentation possible. Here are a few key strategic issues that can help set the stage for a successful loan application. Clean up your personal finances. Among the many pieces of data collected by banks to evaluate loan applications, none may be more important than the credit history of the borrower. As a result, bankers are paying more attention to applicants’ personal net worth and loan- repayment history instead of merely looking at their company’s balance sheet and cash flows. An acceptable personal credit history not only suggests good character (an essential quality in the minds of most lenders), but it also strengthens the inevitable personal guarantee of your business’s loans. Get a copy of your credit report from one of the major credit bureaus and try to clear up your credit problems, tax obligations and liens, if any, before you ever start talking to a banker. Recruit a team that will impress a lender. Most banks are leery about making loans to companies that look like a one-man band. Surrounding yourself with experienced, reputable employees and professional advisors tends to comfort lenders, especially if they don’t know you but they do know one of your key people. Assembling a strong cast of characters doesn’t happen overnight. From the inception of your business you should look for competent, well-connected CPAs, attorneys, insurance agents and other professionals who both look good on paper and will serve you well. Minimize lawsuits. If you’re ever pondering whether to settle a dispute or take it to court, consider this factor: Lenders don’t like borrowers who have a history of litigation. Repeatedly going to trial "on principle" may satisfy your sense of justice, but it will not endear you to your banker. Become fluent in discussing your finances. People usually go into business for themselves because they either (a) know how to run a business or (b) have the technical or artistic skill that their trade demands and don’t want to work for someone else any more. Lenders tend to favor borrowers who demonstrate both sets of skills. Thus, if you’re launching an architectural firm solely on the basis of your design skills, you can’t afford to let your accountant "take care of the numbers." You have to know what the numbers represent and be able to answer every question a lender is likely to throw at you. Also, make sure your financial information is current. Never approach a bank with financials more than one quarter old; six-month-old financial reports tell a loan officer that you don’t follow the progress of your business very closely. Make friends with lenders early on. One reason that small business owners fail in their quest for bank loans is that they wait until they’re in a bind before they start the process. It’s a good idea to cultivate a relationship with one or more banks before you need a loan. Go to your local branch or bank business office and meet the manager and loan officer. Begin the education process. Tell them a little bit about your company. Give them your current financial statement, "just for their files," and send them quarterly updates. And then keep in touch. In many cases, that personal relationship may make up for weaknesses that would otherwise torpedo your loan request. Understand bankers’ benchmarks. Banks are often reluctant to lend if your debt-to-equity ratio is over 3 to 1. Check your balance sheet; if you’re already too highly leveraged, pursuing a bank loan may not be worth your while. With respect to your income statement, watch your expenses. Ideally, your yearly net profit will be about 1.5 times the amount of repayment. Running a lot of quasi-personal expenses through your business may be a plus at tax time, but for a prospective lender all you’ve done is inflate your overhead and reduce your profitability. Know which banks are making the kind of loan you need. Many banks set minimums for small business loans, and you don’t want to waste time with lenders whose loan limit is too low. Your goal: finding a bank for which small business loans are a priority, not a sideline. Small community banks, which have a long history of providing loans and personalized service to local entrepreneurs, may still be the best source for loans of less than $1 million. Unfortunately, such banks are increasingly hard to find in this era of bank acquisitions. Once you’ve identified a few candidates in your area, shop around for a bank that’s willing to negotiate fees, collateral and terms of repayment. Anticipate lenders’ unfamiliarity with your industry. This is another area in which doing your homework can help you save time and avoid frustration. Like most companies, banks tend to pursue certain lines of business, and they organize and educate themselves to serve their target markets. If you’re in manufacturing, you may not get very far with a bank that’s geared up for retailers or service companies, simply because they don’t understand your industry. Going through the same research process we suggested earlier, you can find out which banks make loans to companies like yours or, better yet, have loan officers who are specialists in your industry. If your business is in a non-traditional industry, no bank may understand what you do. In that case, you have to become an educator. Put together an orientation package on your industry that might include trade publications, articles on similar companies, etc., to give prospective lenders some much needed (and much appreciated) background. Taking this extra step also allows you to impress lenders with your knowledge of your industry, which doesn’t hurt a bit. Demonstrate what the loan will do for you. Too many small-business owners go to the bank without a clear understanding of, one, exactly how much money they intend to borrow and, two, the purpose for which the funds will be used. Before you go to the bank, perform an in-depth analysis of your borrowing need. Be prepared to show how expanding your plant, or adding that new piece of equipment, or receiving that influx of operating capital will increase profits and strengthen your repayment position. Also be prepared to discuss the timing of your request. Perhaps you anticipate changes in the market. You’ve seen a steady growth in your customer base that can be accelerated further with the loan you seek. You want to introduce a new product line, and your market research bears out its worth. Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market. |
