Need A Business Loan -- Do Your Homework
Do you know how a banker makes a decision to loan (or not loan) you money for your business? (Before you answer that let me warn you, it's a trick question.) If your answer is no, I hope you have never asked a bank for a business loan, because you are not ready. You've got some homework to do.Actually, it's not that complicated. You might already know all you need to know, because getting a bank loan is not unlike one of the first things you learn in selling: how to qualify the prospect. Here are some qualifying steps:
• Who is the decision maker?
• What do they need?
• How do they want it delivered?
• What motivates them?
• How motivated are they?
• What do you have to do to make the sale?
With some slight variations, you should qualify any bank that is considering your loan proposal the way you qualify a prospective customer. And just like in selling, part of the qualifying process is to do your homework. Here's what you need to know:
Who is the decision maker?
You have the right to ask who is going to make the decision on your loan. Every loan officer has his or her own lending limit, and who makes the decision on your loan will largely depend on how much you are asking for. The lending limit for a junior loan officer might be $1,000, whereas a more senior officer might have a limit of several hundred thousand dollars.
Sometime during your conversations try to determine your loan officer's limit. If you can't get it by just paying attention, as you get near to presenting your proposal, you might ask a question like this:
"John, as you know, my request is going to be about $25,000. Is that a decision you can make, or will it have to go to loan committee?"
Don't be surprised if your banker says something like this: "My personal loan limit is $50,000, so the decision will be made in this office." Or, maybe this, "That's within my limit, but I will probably bring in our commercial expert, just to make sure we provide you with the best structure." Or, "All real estate loans have to be reviewed by our loan committee." Either way, you've got your answer.
Why do you care? Your goal is to get the loan. The more people involved in the process increases the scrutiny of you, your company, and your deal. More scrutiny means more questions. More questions means more time from proposal to answer (notice I didn't say approval). By knowing how many layers are between you and an answer, you know:
1) How many proposal packages to prepare;
2) How long an answer is likely to take;
3) How prepared you should be for new questions that your loan officer did not ask;
4) How important it is to take your proposal to more than one bank.
Here are some rules of thumb for point number two, how long it will take to get an answer: Your loan officer making the decision - 1 to 3 days; Your loan officer and his or her manager - maybe an extra day or two; the local loan committee - one week to ten days; an out of town committee, as in a larger regional or national bank - 1 to 4 weeks.
Point number four, should you go to more than one bank, is very important: Unless you believe your request is a slam dunk (you know the loan officer VERY well and you know you have a conservative proposal), you should always take your loan to more than one bank. I recommend you take it to at least one independent community bank, where all decisions are made locally, and to at least one larger bank. Nothing wrong with going to three banks.
Make your proposals to the different banks within a day or two of each other. If you get turned down at one, you not only have a back-up, but you don't have to say anything about being turned down because you made the request at the second bank before you were turned down at the first. If you get approval at more than one bank, that's a high class problem. Go with the one that offers the best interest rate, terms, and least collateral.
I don't recommend you say anything about shopping around, but don't deny it if asked. Most bankers know they are in a competitive environment, so they assume you are looking down the street.
What do they need?
Will your banker need a copy of your business plan? That depends on the size of your request, and what you are going to use the money for. If the loan is to buy out a competitor, yes. If it's to buy some equipment that can be used as collateral, probably not. If you are buying real estate, you will need a current appraisal.
Your banker will need financial statements, but depending on your request, they might accept last year's. Or they may want the most recent year-end statements PLUS interim statements.
The reason you need to know what a banker wants (and needs) before you go in, is to make sure you have it before you ask for the loan. If you are asked for interims, or a business plan, and you don't have them, that's information the bank will use, but not in your favor.
Remember this: The level of sophistication of your request begets a corresponding level of banking sophistication. As you go up in sophistication, your banker will dial in the necessary resources on their end, but they will also anticipate, and expect, that you will have the sophistication personally and corporately to make such a request. If they don't see the appropriate level of sophistication, you will not get the loan. Do your homework.
How do they want it delivered?
Ask your banker how he or she would like to see your information and proposal: Verbally, in writing, in a fancy binder? Find out how they want it and give it to them - as soon as possible.
What motivates them?
This might be hard to believe, but all banks don't like the same kinds of loans. Some banks like to make working capital loans, and some don't. Some banks take pride in helping small business, and some just talk about it in their advertising, but don't actually deliver. Some banks will make a real estate loan out of their market area, and some won't. During your conversations, the things that your banker says about your proposal will tip you off about their attitude with regard to your type of proposal. Here's what that might sound like:
"This looks good. We have a lot of computer upgrade loans in our portfolio." Or this, "Hmm, we don't make a lot of used car floor plan loans. Not saying we won't make this one, but we don't do too many."
If you don't get some indication of the level of interest, it's OK to ask. "Susan, does your bank make many asset based loans with accounts receivable and inventory as collateral?"
Here's something you will find interesting. What a bank is interested in today may be different in a year. Don't ask my why, but it's true. So if you wrote a bank off last year (or if they blew you off), give them another chance. Things change.
How motivated are they?
Sometimes you catch a bank when they need loans. A deal that couldn't get through the front door of Bank A might be received with a red carpet at Bank B. I'm not talking about a bad deal. No bank is going to work a deal that's got lots of classic problems. I'm talking about a deal that might fit the loan profile of one bank but not another one.
If you've got good daily deposits, and are willing to move your accounts, a bank's motivation will increase if they need deposits (which they always do). Or if they have your deposit business and they fear you will move your accounts - that motivates them, too.
If you've been in business for a while, you've got a deposit history. Ask your banker what yours is. This is important information, because the bank down the street will ask for it, and by asking, your deposit bank will know you are using it. One question and one answer motivates two banks. That's right, you have leverage, too. Use it. But you've got to do your homework first.
What do I have to do to get the loan?
In addition to the paperwork already mentioned, you might have to show your banker a demonstration of the new equipment the loan is for. Show-and-tell is always a good move, especially if it's outside of the bank (bankers like field trips).
Take them to see the land, or the building you want to buy. Show them how the new location will help you grow your business (and therefore, your deposits).
Another thing you should realize is that some things are out of your banker's hands. There are internal, state, and federal regulations that every banker must deal with. Some regs are internal: "No loan officer at First Midstate Bank will make an unsecured loan of more than $10,000." Or there might be a state or federal statute, such as the requirements on real estate loans, that doesn't mean you won't get approved, but might create extra hoops you and your banker have to jump through.
Find out if what you want conflicts with any of these rules, regulations, and "hoops". If it does, don't waste your time, and a future relationship, by asking for something that isn't going to happen. If you know that the regs and "hoops" won't keep you from getting the loan, but certain things must be done to satisfy them, help your banker out - be part of the solution, not part of the problem. Most bankers are looking for ways to make a loan. One of those ways is help from you. The best way for you to help is to do your homework.
Write this on a rock... Regardless of whether you are borrowing $5000 for a computer system, or $5 million to buy out a competitor, NEVER take a loan proposal to a banker without knowing what's going on inside those walnut paneled walls while you are waiting for an answer. Bankers like smart borrowers. Smart borrowers makes a banker's life easier. If you want to help your banker help you, do your homework before you ask for a loan.
