by Robert D. Roberson
Most banks want to say yes to your loan request. So what is the best strategy to obtain the yes answer?
First, finding the right bank and the right lender within that bank is critical. Banks and lenders have loan “sweet spots” regarding size and type of loan. Do your homework and make sure your loan needs also fit the bank’s needs. You can determine a bank’s expertise by asking peers for a referral and introduction. Ask your attorney or certified public accountant for an opinion. An introduction always helps break the ice.
Assuming you have performed your due diligence and have selected the best bank and lender for your needs, what information does the bank need for its decision? The following top 10 factors are key to obtaining the desired loan approval.
1. Mutual trust. It is critical that the lender and the borrower trust each other. Without trust, the approval process becomes arduous. Small issues become big issues. With mutual trust, less proof is necessary. If you sense that trust is missing, you might consider approaching another lender or financial institution. Having an account with the institution before requesting a loan can help build this rapport.
2. Ability to repay. The bank wants to be repaid, and it’s the borrower’s job to prove he or she can handle the loan payments. Before the Great Recession, relaxed lending standards made the bank more an investor than a lender. But now standards have increased, so you need to think ahead and show in your plan how the increased capital from your loan will increase revenue for your company, allowing you to pay back the bank.
3. Credible financial information. The bank will need two or three years of financial statements and tax returns from you. For a new business opportunity, several years of projections are necessary. The borrower should make sure the statements and tax returns agree and support the loan request. The financial statements should tell the repayment story.
4. Equity. The lender’s opinion is that the borrower can never have too much equity. Equity is the source of the bank’s collateral. Any business, and especially a growing business, must retain some of its earnings. A highly leveraged business with little equity readily becomes stressed in a contraction. The economy or products never grow in a straight line. Business is always cyclical and reverts to the mean.
5. Committed borrower. How personally vested are you in the business? Are you committed enough to guarantee the loan personally? If you aren’t committed, this sends a signal to your potential lender, who will wonder why the bank should commit.
6. Taxes paid. Real estate taxes must be paid on time; otherwise they are a senior lien on real property. Your income taxes must also be paid on time and in full; this shows that you are financially astute and that you take your obligations seriously. Do your financial statements suggest untaxed income? Untaxed income is a potential hidden liability.
7. History of success. A proven record of success is strong evidence of future success. Conversely, prior problems are a difficult hurdle to overcome. Either way, a compelling story can validate the financial information and the ability to repay. Be prepared to share details about how you overcame adversity or how you have used creative problem-solving to right the ship. Tell the lender about your key employees and how they contribute to the company’s success through their education and experience. Compile customer reviews that show strong support for your product or service.
8. More business. Banks like to work with a client that is increasing their banking relationship. An existing relationship with the bank lends credibility and history. A client that is a great champion of the lender is also valuable to the bank. Great enhancements are: “I will refer more business to the bank.” And, “I will do more business with the bank.”
9. Mutually profitable relationship. Both the borrower and the lender should expect a fair overall business relationship. The bank needs a fair return, and the borrower needs costs and fees in line with the risk and relationship. If you think you’re not getting a competitive rate or favorable terms, ask the lender whether there are other options. Or shop around at other banks.
10. Fun. Banking should be fun. If not fun, working with a bank should at least be cordial and respectful. If it’s not, either the bank or the borrower should find a better fit. There are many banking opportunities available in the St. Louis area, so you don’t have to remain in a stressful situation.
Realize that there are many types of loans that can be offered by financial institutions, some requiring more documentation than others – with rates that vary with the perceived risk. Work with your loan officer to investigate various options so you’re sure the loan offered best meets your needs.
In today’s improving economy, banks are eager to work with business owners. Whether you are expanding your business or starting a new one, do your homework and consider these tips and you’ll improve your chances of getting the right loan that makes the most sense for your business.
Robert D. Roberson is chairman and CEO of Frontenac Bank, a locally owned St. Louis bank with four branches specializing in commercial banking and lending. The locations are in Frontenac, Kirkwood, St. Charles and Earth City. Find more information at www.frontenacbank.com.
Submitted 10 years 150 days ago