Approved! How to Increase Your Chances for a Business Loan
An Inside Look at a Lender’s Perspective
By Betty Rengifo Uribe, Ed.D.
Executive Vice President, California Bank & Trust
Business & Personal Banking Division
As the economy starts to show signs of recovery, many business owners are looking to expand, perhaps bring employees back, and begin to re-build their business.
Business owners can increase their chances of obtaining a small business loan by being prepared and understanding what their lender will be looking for when they review the loan package.
An introduction letter will set the business apart from other loan applications. It gives the lender information about the history of the business, the management team and their expertise in the industry, what the business does, who are their customers, their competitors, and how they plan to use the loan. This takes the loan package from an exercise of “crunching the numbers” to enrolling the lender into the business owner’s vision.
THE FIVE C’S OF CREDIT:
This is a method lenders utilize when determining the credit worthiness of potential borrowers. This method looks at five characteristics of the borrower as follows:
CHARACTER: The bank looks at the company and the owner’s reputation, and the honesty with which they complete their loan application package. When filling out a loan application, every blank should be filled out. Leaving blank spaces might give the impression that there is something being hidden. If it’s not applicable to the business, it is best to put “N/A,” rather than leaving blank spaces. Recommendation letters from key customers will also set the business apart.
CAPACITY: This measures the borrower’s ability to pay the loan, given the company’s recurring debt. Some lenders call this “leverage.” This includes any recurring payments currently utilized to service a debt obligation. These do not include payments that can be canceled at the payer’s request, like newspaper or magazine subscriptions. Normally the lender will look for your total (combined personal and business) cash out-flow to be no more than 40 percent of the cash in-flow.
CAPITAL: The lender will look at the initial capital investment the borrower made to the business. Additionally, how much capital is the borrower willing to put toward a potential investment and how much owner’s equity is in the business. If the borrower is investing in their own company, the bank is more willing to invest with the borrower.
COLLATERAL: The lender will look at what other sources of re-payment the business will have if the cash flow is no longer in place. Lenders will take into consideration real estate, stocks and bonds, cash and accounts receivable.
CONDITIONS: Environmental conditions play a key role in the decision. During the heart of the recession, banks look for recession-proof businesses like automobile repair shops and some professional industries like medical offices.
Just like a builder utilizes a blueprint to build a structure, and a traveler uses a roadmap to get to their destination, so a business owner must use a well-thought out business plan to dramatically increase their odds of succeeding as an entrepreneur. When presenting a loan package to a lender, an organized, well thought out business plan can make the difference between getting the loan and getting a decline letter in the mail.
A business plan will show the lender:
• If the business has a chance of making a profit and in what amount of time
• Provide a well thought-out estimate of how much the business needs to grow
• Convince the lender to fund your business
• Define the business market, the customers, and the percentage of the market the business plans to reach, thereby providing a clear revenue estimate
• Show the lender any anticipated potential issues, and how the borrower plans to address them
WRITING THE BUSINESS PLAN:
In today’s electronic environment it is not as tough to write a business plan as one might think. Simply search the internet for “Business Plans;” there are many vendors that for under $20 will walk you through putting together a well-thought out, comprehensive business plan.
A FINAL NOTE FOR START-UPS:
From a banking perspective, these are the toughest to obtain financing. As Todd Hollander, EVP, head of Business Banking for Union Bank said: “Treat your banker like a customer; set their expectations correctly and work hard not to surprise them…. one of the best things you can do for your business is keep your personal credit clean; the cleaner you keep your personal financial affairs, the easier it is for a bank to provide you capital.”