Q&A by Julia Paulus Ogilvie
Learn How To Lock In The Financing You Need Tomorrow Today
St. Louis Small Business Monthly asked area bankers: “If you could offer one piece of advice to a business owner seeking financing in 2015, what would it be? How has that advice changed in the past five years?
I think the biggest change is loan availability. Five years ago funds were much tighter. I have said for many years: In order to succeed, entrepreneurs and business owners must have a well-thought-out business plan. This would include a plan to finance the business! With that being said, business owners must complete the same due diligence on possible lending partners as they would a CPA, attorney or insurance provider. There are funds available for business loans. Borrowers must find the financial institution that will fit the need.
I talk to many entrepreneurs frustrated by the application process because they went to the wrong lender to begin with. Talk to your accountant, attorney, the SBA and other business owners to determine which institutions have a history of lending to your industry and business style. Do the research and finding the right financial partner will be much easier and less time-consuming. Remember: Business success is not an accident. It is the result of good planning.
–Mitchell Baden, executive vice president and chief operating officer, Royal Banks of Missouri
Plan ahead. Don’t just approach the loan as “what type of financing I need right now.” Approach it as “what type of financing will I need a year or five years from now.” Map a direction for your financing plans and preview your profit-and-loss and balance sheet to support those plans. I also encourage a three-year projected profit-and-loss statement for borrowers regardless of time in business. Putting those numbers on paper really helps you plan for your business’s future.
The advice hasn’t changed much, but the incentive to follow it has. Interest rates are going to climb in the next 18 months. Business owners that plan ahead and lock in longer-term financing now could save considerably on interest cost over the next five to 25 years depending on the collateral involved. Taking advantage of the opportunity before the market shifts could be a real competitive advantage down the road.
–Larry Cresswell, vice president-small business lending, Bank of Washington
As a small-business banker, I would advise any business owner seeking financing to be prepared to discuss their company revenues. All too often small-business owners do not know how to explain their revenue trends. Whether the trends are higher or lower than the previous year, trends need to be explained. If lower, why and how will that change this year? If higher, what contributed to the increase and is it sustainable over what period of time? Having answers to these questions prepared ahead of meeting with your banker will be appreciated by the banker and provide a smoother process.
The advice has not changed in the past five years. Over the past few years revenue trends have become much less consistent. Business owners are still working through the effects of the recession and are finding ways to stay profitable.
–Debi Enders, assistant vice president, small business banking, Commerce Bank
Understand the importance of global cash flow. Today, few banks are willing to make loans based solely on collateral or a specific project’s or business’s profitability without regard to the owner’s personal obligations or ownership in other businesses or projects which may be operating at a loss and draining cash flow. At St. Johns Bank, global cash flow is often the deciding factor in the approval or denial of a loan.
–Brandy Ebers, commercial loan officer, St. Johns Bank
Projecting cash flow was paramount to loan approval over the last five to 10 years. However, today we can evaluate the overall global ability for an individual or business to satisfy the debt service requirements. For example, if a nonrecurring event causes a shortfall in debt service for one project but another project is doing extraordinarily well, it is the combined strength of the applicant that guides our credit decision. Accordingly, we can often find a solution to provide alternative finance structures to assist our applicants, making it easier to borrow and ultimately enhance their cash flow situation.
–Max Mitts, chief lending officer, St. Johns Bank
Know your numbers. Either personally or working with their accountant/bookkeeper, business owners should know their numbers: their income statement, balance sheet, cash flow statement and tax return. Just as important, business owners should be able to explain the trends in their business and their industry. Trends are important because they let a business owner know whether they are ready to start financing projects to meet demand or boost sales. In addition, analyzing trends can help uncover business fundamentals that need to be addressed in ways other than financing. Through careful analysis, a business owner may find that a boost in sales can be better achieved through cash flow adjustment, creation of efficiencies or other means.
Five years ago, businesses were recovering from the recession. Financing was often about “How do we survive?” Businesses needed to be agile and find new ways to make money just to stay around. Now, getting new credit tends to be more about “We made it. How can we build on that?” Understanding how the business did during those down times will help the owner decide how to cautiously move into a growth cycle.
–Sandy Washington, vice president, retail market manager, BMO Harris Bank
Since the recession a few years ago, I always encourage businesses to seek financing prior to the time they plan to need it. This allows the business to be prepared for the expansion of their operating line of credit, equipment financing or any other credit needs that they are getting ready to experience. Banks will be looking for solid credit packages that include both personal and business tax returns, comparable financial statements as well as year-to-date, and up-to-date personal information, which will help to expedite a credit request. I strongly recommend that the business owner have a great relationship with their accountant and keep their financial information up to date at all times. It is a good idea to have a five-year financial projection prepared as well. A business owner, personally, should keep their personal credit in check in order to maintain a good credit bureau score. One of the most important duties for a business owner is for them to have a relationship with a banker that completely understands their business: how it operates and what the strategic plans are for that business. This is more important today than a few years ago, as the banker will be the client’s voice as an advocate to get the credit approved at the financial institution.
–Stacia Peterson, senior vice president, commercial lending, The Business Bank of St. Louis
Throughout the past year I’ve observed many business owners depleting their personal income reported on their individual tax returns, as conveyed in various tax deductions to reduce tax liability. However, this only impedes the business owner’s ability to obtain financing from banks/lending institutions. My advice to the small-business owner would be to emphasize increased consciousness of varied deductions earmarked, with respect to total personal income. Additionally, when evaluating global cash flow, designation of a vital secondary source of repayment allows financial institutions’ underwriters further constructive consideration. Since the economy’s downturn of 2008, global cash flow has become an increasingly important measure in evaluating credit risks.
–Jeff Blanner, vice president, business banking, First Bank
Submitted 10 years 6 days ago