Despite the widely reported "credit crunch," banks have money to lend, especially banks that depend on their deposits to make loans. Actually, banks must lend money; that’s how they make money.
Meanwhile, the demand for small-business loans is currently down because of economic uncertainty. Even banks’ best borrowers, those with the greatest liquidity, are not expanding because revenue is weak for them. Businesses expand-and borrow to expand-only when revenue is growing or when the prospect for growth is strong.
In short, this is a good time for you to consider what investments can help make your small business more competitive and to look to your bank for financing for those improvements.
It’s important to recognize that banks must follow procedures they have developed to establish trust, to demonstrate that you can pay back the loan. Here are the key elements.
Application form: During high-volume periods in good times, banks use formal application forms to capture your company’s basic financial information efficiently and ascertain how you plan to use the loan and pay it back. With larger loans, bankers like to gather information firsthand, by visiting clients’ workplaces, observing operations and interviewing key people. The application form is only the beginning of building a relationship.
Personal credit report: Have you reviewed your personal credit report lately? Banks still use these to assess business owners’ finances, because the owners’ personal financial condition and that of the business may be closely intertwined. Bill Gates or Warren Buffett would likely get a perfect 800 credit score, but anything above 750 is considered superior.
Business credit report: The counterparts of the consumer credit bureaus-such as the Small Business Financial Exchange run by Equifax-tell banks how a potential borrower is paying its utilities and suppliers. If your company is late in paying bills, that information will surface here.
Tax returns: You’ll be asked to provide personal and business tax returns for three years, at most; some banks need only one year’s returns. Banks rely on these to validate a borrower’s financial data. However, tax returns may not be required if you provide three years of CPA-prepared "reviewed" financial statements. High-quality financial information prepared by a CPA can bring better credit terms, interest rates and fees.
Financial statements: Some startups may not have these, but banks will want to see projections, particularly to analyze the assumptions on which your company bases its projections.
Bank statements: Provide these for the past 12 months.
Accounts receivable and payables aging: Provide these for the latest month.
Collateral: The information you provide must be current and detailed enough to make your case for the value of your collateral. For mature companies, this information may be in the financial statements and may include the value of real estate, equipment and inventory.
Resumes of owners, officers and managers: These are important but can be brief, a single page. Most lenders also will want to meet a borrower personally. They’ll want to visit your workplace to gain insights about your operations and interview key people.
Business plan: More important for startups than for mature companies, this helps on both sides of the table. Writing a plan helps you think through your company’s objectives and how you plan to reach them. It also enables you to control how lenders view your company, because lenders keep these plans on file. Banks review these to verify that you have thought through all the business elements that can affect your company’s success. Remember, briefer is usually better.
SBA forms: If your company is a startup, you should consider financing with U.S. Small Business Administration loan guarantees. SBA loans provide financing-often at reduced rates-to companies that might not qualify for conventional bank loans. Mature, profitable companies should also consider using SBA financing to expand significantly-but not for cash flow problems. Approximately 30 percent of KeyBank’s small-business loans are SBA-guaranteed, and that is an increase over recent years because of the economic downturn.
Legal documents: These include your articles of incorporation, leases, supplier and customer contracts, franchise agreements and employment contracts. They may help your banker understand your company’s management and ownership, but bankers don’t consider them critical once they decide to make a loan.
All this paperwork helps banks understand your company and your financials, to know your managers and operations. This understanding is best built through a banking relationship that inspires trust, which is why banks prefer to lend to customers that use their other services.
The most important thing banks want from the paperwork is an understanding of cash flow: They need to see where your company is generating cash and where it’s going.
Banks also like to understand why new potential borrowers left relationships with previous banks. If you’ve left one bank and want to build a relationship with another, explain why. Be candid; maybe the reason was rates and fees, maybe service. Honesty about this can help build a relationship with your new bank and clearly identify your expectations for working together.
That’s really what small-business financing is all about, and it’s easier than you might think-even now.
James Carriero is Rochester market president of KeyBank N.A. He can be reached at (585) 238-4181 or [email protected].
3/12/10 (c) 2010 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or e-mail [email protected].