Editor’s Note: The Inside Track is a recurring column written by a local business professional. Authors of these columns aim to provide you with their own perspective on a current trend or development within their industry, getting you on The Inside Track.
As local businesses deploy capital to build, expand and retool their businesses, they energize the economy, employ thousands and pay local taxes in the process. As a banker, playing a role in economic reinvestment is one of the best parts of my job. Occasionally, I meet business owners who, regardless of their company size and years in the game, are uncertain about approaching a bank. While that still surprises me, I understand.
Knowing what to expect is valuable peace of mind. Every business owner deserves a banker who takes time get to know your company and offers solutions to support your success – including but not limited to financing. You also deserve to know what lenders look for in determining if you qualify for financing – what type and at what level.
If you’ve ever been turned down for a loan, your banker should be able to explain why. It may not be you. Banks often set limits on how much credit they extend in various business categories. This reduces risk and helps keep a bank strong in the event of a downturn affecting a particular industry. If a loan decline has to do with your financials, a good relationship manager should be able to advise you on steps to improve your position. A consultative banker looks for ways to help businesses gain capital, not excuses for denying it.
If you are considering applying for a commercial loan, thinking through the lender’s questions will help you prepare for the application process, and even strengthen your business for the long term:
What is the purpose of the loan? A business lender wants to be sure the financing is for a legal enterprise, pertains to business and not personal needs, and makes sense at this point in your company’s growth cycle.
What is the primary source of repayment? For a short-term line of credit, lenders may look to the sales cycle of your inventory and accounts receivable. For a term loan, your bank will look to your cash flow and profitability. Banks will also consider secondary sources such as the assets being financed.
How well-capitalized is the business? Do you have sufficient net worth? Can your company withstand economic downturns? A lender will expect you to be invested in the business. It’s okay to have debt, but you should also have equity in the company.
How does your business compare to companies in the same industry? Lenders look at financial ratios, using standards for your industry as a guide. They also consider the industry itself. Is it growing or contracting? How is it impacted by technology? Consider the once-popular video stores that reinvented themselves or went the way of the dinosaurs.
How profitable is the company? Bankers look to past performance as an indicator of future expectations. Lenders like to see three years of consistent profit to show you have the financial ability to meet your needs and pay your debts. If yours is a relatively young company, it may simply be a matter of continuing your steady work for another year or two.
How experienced is your management team in your industry? Have they managed through a stressful time? The nation’s recent recession was both a testing field and a proving ground for many business leaders.
While bankers use these questions to mitigate risk, businesses can apply the underlying principles to foster stability.
Of course, if you have shortfalls in any area, expect your lender to offer advice, not just decline the credit. Bankers can connect you to funding options such as the SBA or other government programs with your success in mind. In today’s lending environment, many area banks have the resources and expertise to help qualified borrowers meet opportunities and demand. Helping you know how to become qualified and guiding you to the right solution is where an experienced lender comes in, working to earn your business for the long-term.
Author Mark Brandon is a senior vice president and commercial banking division manager at Banner Bank. He can be reached at MBrandon@bannerbank.com or 360.213.0560. Member FDIC, Equal Housing Lender.