It’s time to step up to the plate. Whether you’re ready to start your own firm or expand operations, buy business real estate, purchase equipment, or increase working capital, you may need to secure a small-business loan. And that requires more than filling out a couple forms. The last thing you want to do is extend a clammy, tremulous hand when you meet your banker for the first time. Not to fear: With these five tips, Jeff Parker, SVP of the Small Business Segment for U.S. Bank, will help you impress your local business banker and secure the loan you need.
1. What’s Your Story? There are four phases in the loan-request process: loan-purpose analysis, repayment-source analysis, loan structure, and loan management. “The four phases,” Parker says, “align with the ‘5 C’s of Credit’: What is the Character of the Borrower?, What are the Credit Conditions requested?, What is the Capacity for repayment?, What Capital is the borrower investing?, and What Collateral is being used?”
It all boils to one thing: the story behind your business. And it’s a good thing the lender wants to know all the gory details because it will protect you against taking an unpremeditated, sloppy risk.
“A good banker will want to understand the story,” Parker says. “What does the business do? Who are the customers? What industry is the business in? What products or services are provided? How do you get paid? When do you get paid? When does the company pay providers? What are the margins? Why is a loan request being made? How has credit been managed in the past? What are the company’s sales and financial trends?”
The vehicle for your story is a well-crafted business plan, which should answer the questions related to the “5 C’s of Credit.” “The business plan helps tell the business story, and each section of the business plan is important,” Parker says. “But sometimes, bankers will want to jump ahead to look at the historical financial-performance trends to understand if the business is growing or not.”
For more info and resources on writing business plans, read these 4 Best Practices to Start and Stay in Business.
2. More Paperwork, More Collateral. After a fairly deep recession a few years ago, things have changed in the lending landscape, and small businesses have changed, too. “Small-business owners have survived the recession by focusing on their customers, tightening expenses, and building up their cash reserves,” Parker says.
He assures that “banks want to lend,” but lenders are more cautious than in previous years. “For example, additional paperwork may be required to show the borrower’s capacity to repay the loan,” he says. “We have also seen an industry increase in lending that is secured by collateral, such as a loan secured by equipment or a vehicle.”
Putting your valued possessions on the line may seem like a dangerous proposition, but it may be the tipping point for securing a loan. “Banks want to take prudent risks,” Parker says. “Collateral strengthens the loan proposal and may mean the difference between approving a loan or not. Collateral may also reduce the interest rate charged because there is less risk for the bank.”
If you don’t have collateral for the loan, the other 4 C’s in your lending proposal will need to be ironclad.
3. Call Your Accountant. Typically, new businesses need funding to support growth for up to 36 months. Do you know how much to ask for? What’s realistic? If you keep putting off your loan application because it seems like more than you can handle, it’s time to get in touch with a CPA.
“Each business is unique,” Parker says. “Financial projections will need to be created. These projections include income statements, balance sheets, and cash-flow statements. Different scenarios should also be developed. For example, what happens if it takes twice as long as expected to get started? What happens if payments are delayed 90 days?” Cash flow is king for small businesses. You may want to work with a CPA to help develop the financial statements and scenario plans.”
4. Muscle Up Your Credit. Remember the “5 C’s of Credit”? If you are hoping to secure a loan with a great interest rate, then you need to walk through the bank doors with good credit.
“First, create a high credit score by repaying credit on time and managing credit appropriately,” Parker says. “Second, be able to explain the purpose of the credit needed and work with the banker to structure the loan request. Third, make sure that the loan can be repaid… with a bonus for uncertainty. Fourth, make sure you have equity—example: 25 percent down—in the proposal. Fifth, provide collateral for the loan.”
To learn more about improving your credit score, read this article from MyFICO.com.
5. Build a Relationship. Securing a loan isn’t the end of the game. Lenders will also track the performance of your loan and the financial health of your business. So entrepreneurs need to maintain a positive relationship with their lenders. The good news is that the best lenders provide small businesses with more than a large chunk of change. They are also a valuable resource and financial advisor.
“We want to help the business owner achieve their dreams,” Parker says. “One dream is growing a successful business. Most banks want to provide a banking relationship, which is more than being a lender. Good bankers may also provide assistance on cash management, payment solutions, credit-card acceptance, equipment financing, and consumer solutions.”
To get the most out of your bank-loan experience, trust is key. “A relationship starts with both parties doing things as agreed,” Parker says. “A good relationship builds over time with regular contact and the banker really knowing the business owner and understanding the business. If hiccups occur in the business, it is best to talk with the banker about various options.”
Read more tips to prepare you for meeting with a business banker at U.S. Bank Connect.