Getting a Loan in Today’s Lending Climate
Credit is available, but expect closer scrutiny of your loan request
Although a Federal Reserve survey, released recently, found that many banks are tightening their lending standards for businesses, there are still many banks looking for good deals and many of them are getting funded. A few banks have shut off the lending faucet; however, most banks are reacting to the economic slowdown by scrutinizing each loan request much more carefully and by seeking more loan guarantees from agencies like the Small Business Administration.
The second tier lenders, those that are not main stream and a little harder to find, are currently very busy with loan requests and loan funding. Lloyd Easters, of Crossroads Capital Group in Indianapolis, says that loan requests have picked up from borrowers that don’t fit into the traditional box with the main street lenders. These sources have higher rates, but are much more flexible in lending to businesses that traditional banks won’t finance.
If your company is making money and can make a lot more money with more availability to credit, paying a little more in interest cost can be insignificant. Traditionally these second tier lenders will advance more on accounts receivable and provide higher advances against key assets: equipment, buildings and land than traditional lenders. If your company can make $100,000 more in profit because you have adequate financing, and it costs you an extra $10,000, the company is still $90,000 ahead.
How to win loan approval:
To increase your chances of having your loan approved, approach your bank with conservative financial projections and a realistic business plan. Overly optimistic sales forecasts (compared to historic levels) combined with unusually high margins and profit estimates won’t be viewed as realistic by your conservative lender. Make your business plan clear and easy to follow. The company history section is a good place to high light the management and industry experience of your team. Give examples of victories and include a SWOT analysis in your plan to show you have studied the market and the competition.
In the financial projections make sure to include: your assumptions on how revenue is going to grow, how margins will maintain or increase, how you will control expenses, and improve profit as well as cash flow. Always include a break-even-point for each month and focus on your ability to drive your revenue past your break-even-point to dramatically improve profit. Also, it is important to discuss your weaknesses and how you will overcome them. The person reading over your information is going to make a list of your weaknesses; you need to attack these issues upfront because the lender is going to ask about them. It is better to be up front and ahead of the game instead of looking as if you “don’t know” or are trying to hide something. This step adds creditability to yourself, your company and your proposal.
There are great resources on the web about how to structure a business plan for your specific industry and life cycle. The goal of your business plan and your proposal to the bank is to help the lender say “YES” to everything proposed.
Yes – I like the loan proposal
Yes – I like the type of business
Yes – I like the management team
Yes – I like their forecast – they tie to their historic performance and it makes sense
Yes – I like the collateral
Yes – I like this and will fight to get it approved
Yes – we would like this business as a customer
Finally, don’t allow a weak economy to make you shy about seeking our new sources of financing to support your growing and expanding business. Banks need to make loans to keep their earnings growing and that is a benefit to the business looking for financing.
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