Applying
for a business loan can be intimidating and
stressful, and it can be confusing to have an application rejected with little
explanation. There are steps company executives can take to avoid some of the
possible confusion and to develop a more positive experience while applying for
a business loan. Two of these steps are described below, and should be
completed prior to approaching a financial institution about a loan.
1)
Research Lender Options
Like any business
operator, financial institutions want to make money in their business. While
they want to lend money, they don’t want to approve credit that will ultimately
result in loss. Further, regulatory requirements often influence the types of
loans that can be approved. As a result, a major concern of any institution
considering approving a business loan is whether the owner and the business are
good risks.
“Good risks,”
however, can mean different things to different lenders, which is why it is a
good idea to do some basic research on the financial institution you’re
considering before walking in and trying to apply for a loan.
2)
Articulate Needs and Repayment Plans
According to a
recent Pepperdine study, banks and asset-based lenders only rarely cited a
company’s size or economic concerns as the reasons for declined loans. Instead,
the top reasons were tied to the quality of the business’s earnings or cash
flow, or to the fact that the company had insufficient collateral.
More simply, the
borrower didn’t meet the lender’s requirements.
Business owners and lenders
often have mismatched expectations from the start, so it is good to ask a lot
of questions to avoid confusion and additional problems. More importantly,
lenders desire potential borrowers who approach the bank with a detailed plan
for using the money and for repaying it.
Is the money for
growth to buy a certain piece of equipment or to open a new facility in a
neighboring town? Is it for working capital because you’re behind on
payments to vendors and you’re about to get cut off, or is it because your
sales have outpaced your ability to finance raw materials?
“We’re not afraid to
loan to businesses that can clearly demonstrate and articulate the plan – the
plan for repaying the loan, for improving cash flow or whatever,” says Mark
Swanson, acting president and CEO of Northside Bank. “I’m not talking about a
20-page binder. It can be a handwritten single page that says, ‘Here’s my
problem, here’s how you can help, and here’s how I intend to repay it.’ What I
want to see as a banker is that you as a business owner understand your
business, understand what has caused the problem to begin with, understand how
you’re going to fix that, understand how the bank can help and how you intend
to repay the loan.”
3)
Respond to Roadblocks (Potential and Real)
Knowing how a
business stands on key financial metrics that predict default is important when
a company is considering seeking a bank loan. Sometimes the evaluation process
itself will allow a company to address potential roadblocks to a business loan.
For example, a
company owner might recognize the need to identify additional collateral for a
loan – stocks, bonds or the owner’s house. Or a business owner may decide that
the timing probably isn’t ideal to seek a business loan, Booth says. “If the
person can kind of do their own homework, they may ask, ‘Does it make sense to
ask for this?’"
The owner may decide
to work on extending payables, or to offer a discount for faster payment on
receivables in order to generate some additional cash flow that can make a
credit request more attractive in a few months.
Source:- aabacoSmallBusiness
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