Tag Archive for 'Financing'

How to get a bank loan: Part One

One of the markers of this post-recession, so-called recovery has been the practice of deleveraging. Across the economy, from consumers to businesses large and small, debt has become something to get rid of.

Out here on Main Street, this trend has manifested in a dramatic drop in bank borrowing by small firms. Indeed, for more than a half decade, survey after survey has shown that less than 5% of business owners report their borrowing requirements have not been met, while the majority say emphatically they don’t want or need a loan. Consequently, there’s a pretty good chance your business hasn’t made a loan request to a bank in a while.

But the economy will eventually kick into an expansion phase, and what has become no less than a de facto moratorium on borrowing won’t last forever. And since most small business growth capital comes from bank loans, even for well-capitalized firms, it’s always good to revisit a few banking relationship fundamentals.

But don’t worry. If you’ve never asked a banker for a loan, or if it’s been a while, getting a bank loan is a lot like the process of qualifying a prospective customer. For example, you want to know these three things:

1. Who decides?

You have the right to ask who is going to make the decision on your loan. Can your loan officer decide, or will it go to the local loan committee or somewhere else? Why do you care? The more people involved in the loan approval process increases the scrutiny of your deal, which means more questions and more time for you to budget from proposal to answer.

2. What do they need?

Your banker will ask for personal and business financial information. They might accept last year’s business numbers, but they could also ask for an interim report. Depending on the size of your request and what you’re using the money for, they may ask for a business plan. If the loan is for real estate, a current appraisal will be required.

Don’t give the bank more than they ask for, but give them everything they ask for. Remember, the quicker your banker gets the information, the quicker you’ll get an answer.

3. How do they want it?

Ask your banker what information can be presented verbally and what needs to be in writing, whether hard copy or electronic. Whether you’re borrowing $5000 for a computer, or $5 million to buy out a competitor, knowing as much as you can about the loan approval process will significantly improve your chances of not only getting a quick answer, but a yes.

Next time, Part Two: What motivates your banker.

Write this on a rock …

Qualify a bank like you do customers, and be sure to do your homework.

Small Business Bank Relations are Improving

One of the markers of big businesses, especially publicly traded ones, is they have many capital sources.

For small businesses there are basically only three:

  1. Equity capital from the founder(s) and investor(s).
  2. Retained earnings - profits left in the business.
  3. Borrowed funds, typically from a financial institution.

The lion’s share of all small business capital comes from # 3, bank loans. Consequently, since small businesses generate over half of GDP, it’s easy to see that the health of the banking industry, and its receptiveness to small business, is vitally important to the U.S. economy.

Periodically, we poll our audiences about their banking relationships, which we did again recently. We asked, “Which example best describes your recent experience with a business loan from a bank?” and here’s what we learned.

Almost four of ten of respondents to our unscientific poll said, “We have gotten a business loan from a bank in the past year.” About one fourth of our sample said, “We can get a loan from our bank if we need one, but we don’t want one.” Here’s the good news for the economy in these responses:

  1. The greatest number of our respondents wanted, qualified for, and got a bank loan;
  2. At this point in the recovery, most bank loans by small businesses are more likely to fund opportunities rather than to save the business;
  3. Added together, approximately two-thirds of our small business respondents are confident they have the ability to borrow capital when, and if, they need it.

Sadly, about one-third of our audience is still struggling with their capital requirements. Ten percent said, “We need a loan, but can’t find a bank that will loan to a small business,” and 27% reported, “We need a loan but haven’t tried because we don’t think we can get one.” In a healthy economic expansion, these two groups should total no more than 10% to 15%.

There are a number of economic and political issues making up the loose gravel that the U.S. economy is currently standing on as it struggles to find growth footing. But an improving banking picture for small businesses is definitely a good sign of economic healing and expansion potential.

Every small business needs a good banking relationship, so keep trying until you get one. But remember, the perfect form of capital is retained earnings, because it is profits, produced from sales you make to customers, that you were disciplined enough to leave in the business.

Retained earnings will make your banker very happy.

I talked with Mike Menzies, President and CEO of Easton Bank & Trust in Easton, Maryland, recently about the key elements of a successful banking relationship.

Click here to listen or download our conversation.

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