Banks are not lending! So says the media coverage and your business owner friend down the street. While this may be the perception out in the market place, I’ve always held to the premise that there is always a little truth in any perceived state of affairs. For my part I do believe that lending has tightened and that with the new regulatory pressures that banks are now going to be facing that this may hamper lending even further. I also think that the businesses that are still getting loans will encounter conditions they never had before such as higher scrutiny of their financials, guarantee requirements, collateral conditions and exclusions, stricter loan to value ratios, higher debt service coverage ratios, and other convents that a bank might place on the business looking for credit.
Add to this that banks are doing what they can to preserve their capital. I’ve seen for myself business owners and professionals being asked to leave a bank; even if those folks are solid from a lending and banking standpoint. The reason for this is two-fold, first, a bank can enhance their capital standing by raising more of it or by freeing it up. If a bank can’t raise capital, which is getting very hard for banks to do these days, they can free it up by having loans pay off or by calling them due. That’s the reality for a lot of banks and their customers in the current state of the economy.
So what to do? First, there are banks that are lending (hint hint). That being said, let me give you some secrets (more like insider insight) that banks are going to be looking at here in the future when it comes to lending. For this purpose of this blog post I’m going to have to assume a few things. First, I’m going to assume that we are dealing with an existing business and not a start-up; that’s a blog post for another day. Second, I’m going to assume that they have had credit in the past or were at one time credit worthy. Third, I’m going to assume that their business is not as profitable as it was a few years ago. Four, I’m going to assume there have been some issues that are giving the bank pause in wanting to re-issue credit or establish a new credit facility. So now that we have the ground rules let’s see what we can do. Please note that if there is an issue that I haven’t covered in my synopsis please drop me a line in the comment field on a certain issue that you’d like me to address as I’d be more than happy to do so.
First, cash flow is kind and liquidity is queen. This maxim has always been a tenant in banking, but in today’s economy it holds additional bearing. A banker wants to be able to see that you have the means to pay back a loan. More than that they want to see that you have enough in the bank that if things were to tighten up you’d have cash to see things through. It doesn’t matter to your banker how much money is coming in the future if you don’t have enough money to pay your employees paychecks until your customers pay. Or pay your landlord when your investors come through in a couple of months. Banks know that your suppliers may not be willing to extend you credit any further and that you may not be able to purchase the goods you need in order to deliver to your customers. More businesses fail for lack of cash flow than for lack of profit. Here is the secret, a banker wants to know if your realistic in predicting your cash flow. Because most business owners tend to overestimate income and underestimate expenses. So if you are not schooled in your company’s cash flow cycles and needs that will make a bank run faster the Usain Bolt. Take time to understand your company’s cash flow. Every business is different and you may need to elicit the help of your accountant.
The second secret of getting a bank loan is to know your numbers and make sure they are accurate and up to date. You put a banker’s heart at ease if you can produce an interim income statement at a moments notice. You’ll also gain favor by knowing answers to your banker’s questions. For example, if Accounts Receivable days have increased do you know why, what are you doing about it? If there is an adjustment on your corporate tax returns do you know what it was for? If sales trends for the company are negative what are you doing to turn them around and how are your adjusting your expenses to compensate. Unfortunately, a lot of business owners rely on their accountants and bookkeeper’s to know the answers to these questions, and while that’s not necessarily a bad thing there is a caution here. If the business has seen better days a banker will demand you become more involved in the finances of the company.
Secret number three, be proactive! I can’t stress this enough, especially if the business is going through some difficult times. Bankers hate surprises and even if the news isn’t good you’ll help your situation if you proactively set a meeting with your banker to discuss the situation. Your banker is there as a resource, illicit his expertise and assistance if problems start to arise. Additionally, if a condition of the loan is annual, semi-annual, or quarterly financials don’t make your banker call you for them. You’ll earn huge brownie points if you deliver them to your banker on or before they are due.
If you are looking to get a loan, bring your financials with you to the very first meeting. Here is a list of what a bank will typically ask for…..
1. Last three years of business tax returns.
2. Interim financials – Income Statement, Balance Sheet, Accounts Receivable Again, Accounts Payable Listing.
3. Last three years of personal tax returns for guarantors.
4. Personal financial statement for all guarantors.
5. A business plan or updated business plan. (It should have forecasted sales, income, and expenses included in it)
6. A personal resume.
7. A listing of current liabilities (business).
Lastly, a banker wants to see your level of committment. If you want the bank to shoulder 100 percent of the risk then you might as well stay home, because no bank is going to lend you money. A banker wants to see that you stand to lose too if things don’t go right. A banker want to know that you have something invested that will make sure you’ll do everything in your power to make a go of it. Your equity position into your business can mitigate some flaws in the credit. Flaws that might other wise bar you from getting a loan in the first place.
I know I haven’t covered everything, so please leave me a comment if there is something you’d like me to address. Also, look for future posts that will cover things I talked about in more detail as I was trying to highlight important points in this post. Getting a loan is not mission impossible, but you can greatly help your cause by knowing these few key points.
The economy is going to improve here soon and when it does your business has to be ready; it has to have access to capital that will ensure its survival through this recession and on into the recovery. Make sure your arming yourself with knowledge that will lead you and your company to success.