Improve Your Chances Of Getting A Bank Loan
Feb 08, 2011
I am currently working with a new small business client of mine on closing a Line of Credit (LOC). Finding a bank in our current lending environment was less difficult than one might expect – so I thought I would share some basic thoughts behind obtaining a bank loan.
Most people have heard the old adage that banks will only lend money to those who don’t need it. This is not necessarily true – remember banks can’t make money unless they are loaning it, the adage is however, rooted in the conservative nature in how banks operate.
So how do you improve your chances of getting a loan?
It helps to have the three C’s – Collateral, Credit and Capacity.
Collateral is a backup source of repayment for the bankers. First and foremost they want you to repay your loan through cash generated by operations, however collateral secures their ability to obtain some type of repayment should business conditions impair operating cash and inhibit your ability to repay.
Credit is your repayment history on past loans. Banks will judge your creditworthiness based on your past repayment history on both your Personal and Business loans. I once met a prospect of a $10 million company who defaulted on a home loan because he thought he would still be creditworthy in his business. I wish he had hired me prior to that decision!!
Capacity is the amount of debt that your company can support. This type of leverage is usually calculated as a debt/equity ratio. The higher this ratio is, the less likely a bank will lend to you. The banks tolerance for this type of leverage will vary depending on your industry.
Beyond the three C’s what should you do?
It also helps to have built a relationship with your banker. I suggest taking your banker to lunch at least once a quarter. Always tell the truth about your business – do not stretch the truth either!! Be confident and be prepared to discuss risk why you are a good risk. Talk about the good, the bad and the ugly. Your banker needs to be able to tell your story to others in the bank – including those who have influence on your loan decision. Building credibility and trust will go a long way to helping you obtain financing.
When you meet with your banker for a loan, you should be prepared with three years of Cash flow and Financial Statement projections. You should know the answers to several questions in advance, such as how much money you will need, how long will you need it, and what you will do with the money received from the loan? The financial projections can answer the first two questions. The answer to the last question is typically to purchase new assets, retire old debts or for operating expenses. It too will be shown in the projections.
I also suggest having a Plan B. Should your banker not be able to loan for Plan A, he/she might be able to accept the risk on Plan B.
These are some basic proven principles that if you follow will make obtaining a loan easier. In summary, be mindful of the 3 C’s, build a good relationship, and be prepared.