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Need a Bank Loan?

Growing a business in challenging economics times can be very confusing and downright frustrating. Can you imagine having a great opportunity to grow your business and not be able to take advantage of it because you lack the money to do so? There is the adage; it takes money to make money! But, what if you don’t have enough money to make a difference?

In the good old days, we could walk into the bank and walk out with a line of credit or business loan. Those days are gone, and I don’t think they will be back anytime soon. We all know the banking industry has undergone some hefty structural changes. It looks like there are more to come. Here are some tips for your next visit to see your banker.

I have a list of 4 things a bank looks at these days to determine if you are worthy of a loan. The first one is Capacity. Do you have the ingenuity, the drive and the perseverance to manage and coordinate everything required to repay the loan? Are you operating within the confines of your abilities and experience? Do you have the cash flow to cover your existing debt plus your new debt? If your cash flow isn’t at least 1.25 times your existing debt load plus the proposed loan, you probably won’t be approved for the new loan in our “new economy”.

Next on my list is Collateral. Collateral quantifies your ability to support your loan request. This is one of those items that make everyone squirm in their chair. Business loans are not quite like a home mortgage. A house can be compared to other houses in the area to establish a value. A business is very unique and usually doesn’t have any comparables. The value of a small business is often in the owners’ head and hands.   Things that an owner has paid for, and considers an asset, is frequently worthless as collateral to a bank. Inventory, desks, and computers are often sold for pennies on a dollar at auction. Today, banks have a need to have their loans “fully collateralized” meaning, if your business doesn’t have enough assets, you will need to have additional personal assets and be willing to pledge them to cover your loan should things not work out as planned.

Next on my list is Credit. A lender always reviews your previous experience as a borrower. Studying your credit history discloses whether you and/or your business have paid previous loans as agreed. While a credit report will not tell a lender how you will perform in the future, this information tells them how you have performed in the past. If it is negative, it might indicate you are unsuitable for a loan. It may also indicate you have not overcome earlier difficulties or don’t take repayment responsibilities seriously. By the way, if you have a perfect credit score, that doesn’t necessarily, make you eligible for a loan these days either. Don’t take it personally!

Last but my favorite is Character. Character may be the most important assessment a lender can make about a loan applicant. It is also the most subjective. Not only is difficult to define, it is difficult to assess. There is no “Character Checklist” for a lender to use. The lender will observe you to evaluate your personal qualities and characteristics. They watch for potential flaws in your attitude, conversation, perspective or opinion about business ethics, responsibility, and commitment. Your character is important because it reveals intent. Right or wrong, a decision on your character is often made in a 15 minute meeting. If a lender doesn’t feel comfortable with your character as a borrower, this information will not generally be directly communicated to you. The loan request will often be denied for other reasons, because the lender will have a difficult time defending a subjective decision without definite proof. This is part of the matrix of underwriting business loans.

So there you have it; capacity, collateral, credit and character. 4 tips for getting a bank loan in today’s business environment. Keep these in mind even if you don’t need a business loan today. You can, and should be, working on these 4 items all of the time. Most of us are very conscious of our credit scores and work to improve them by paying our obligations on time or early. Reducing personal and business debt as much as possible improves your collateral position. Being active in the Chamber gives you an opportunity to build relationships with bankers so they can see you have the character and capacity they are looking for. If character is important, yet hard to assess, spend some time and energy at various Chamber functions. Get your name out in front of bankers that can help you make a difference. Why take a chance of a 15 minute meeting for someone to get to know you?

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