- Barry Brick
Small and Mid-sized companies have always had difficulty getting bank loans. They are not large enough to attract the attention of commercial banks but are too large to finance just through personal credit. Things have only gotten harder since the recession.
Unfortunately, most companies wait until tough times to begin the process of getting a loan. It is best to plan ahead.
Below are the top four reasons companies fail to get loans and what you can do to avoid the situation.
1. LACK OF RELATIONSHIP WITH THE LENDER
All businesses have a checking account but they usually don’t open a checking account with their future banking needs in mind. Sure, the large commercial banks have branches on every corner but are they really the best banks to develop a long term relationship with? Are these banks going to work with your business when you need their help or are you just going to be an account number?
Regional and community banks focused on servicing the local companies that operate in their footprint and understand the needs of smaller firms. Their underwriters are in a better position to take the time and understand your business plan when evaluating a loan application.
2. LIMITED CASH FLOW
We all have heard the adage that banks only want to lend to businesses that don’t need the loan. The reality is that banks only want to lend to businesses that can demonstrate the ability to repay the loan. Typically, businesses approach the bank when they are struggling to manage their cash flow but haven’t really thought through how their financial position will change so that they will have the necessary cash to repay the loan.
If your company is going to ask a bank to lend you money, you need to have a clear plan to be able to meet your payment obligations.
Too often, business owners are surprised by the information requests they receive when applying for a loan. In addition to back tax returns, lenders will request historical financial statements, bank statements, accounts receivable and accounts payable schedules for prior periods and possibly personal financial statements among other items. The bank’s underwriters will notice if these items are presented in a professional manner or are just QuickBooks reports or back of envelope schedules.
Businesses should carefully review these schedules and provide explanation for any items that are bound to raise questions, before the bank asks. This demonstrates to the underwriter that the business owner has good insight into the issues that impact his/her business.
4. NO BUSINESS PLAN
Underwriting is an art, as much as a science. Too many businesses think applying for a loan is a matter of filling out an application and the bank's computers determine whether or not you will quality. Loan underwriting is much more intuitive than that. It is the company’s job to “sell” the bank on the qualify of your business and your ability to pay the loan back. You need to be able to articulate what you will be using the funds for and how you plan to pay them back.
Obtaining financing should be viewed as a sales process. Successful business owners would never approach an important prospect without proper preparation and you shouldn’t approach prospective lenders without that same level of preparation. It is up to the business owner to “sell” the lending institution on the ability of the business to successfully repay the loan in accordance with the terms, backed by planning and documentation.