3 Confidence Boosters For Businesses Seeking Bank Loans
by Bill Conerly
November 26, 2013
Bank loan decisions are mostly about numbers, but there’s still a little judgment left in the process, especially among community banks. Knowing how to boost your banker’s confidence in you as a borrower is key to securing credit.
There are two main areas to the numbers part of the process. First, the bank will look at your financial statements with an eye to your ability to repay the loan out of earnings. They will examine the loan coverage ratio and other quantitative measures of your earnings. The ideal bank customer is already profitable and wants the loan to further increase profits. Your bank is not interested in an unprofitable company whose owner thinks he could turn it around with more debt.
The second set of numbers that the bank will consider is collateral. However, this is very much the bank’s Plan B. The bank does not want to own your warehouse, auction off your equipment, or feed your horses. If the bank is going to have to rely on collateral for repayment, it won’t make the loan. However, the bank still wants collateral.
After running numbers on your earnings and collateral, the bank will look at the intangibles. Although one of the traditional measures of credit worthiness is character, that’s a vague term. Here are the three keys to building a banker’s confidence in you as a business borrower.
1. Knowing your business’s profit drivers. Being able to run the business on a day-to-day basis is not the same as understanding what strategies will boost earnings. For example, some companies can serve more customers without adding to costs. Presenting your banker with a plan to increase sales makes sense. In other cases, a customer base is fairly steady. Having a plan to cut operating expense makes sense. Whatever your business, understand what will drive the company to higher profits, and explain your loan in that context.
2. Understanding your business’s risks. No banker will believe that there are no risks. Even the young bankers know better. Acknowledge the risks so that your banker will know that you know what they are. Never say (though I’ve heard business owners say it) that you don’t have any real competitors. Of course you do. Instead, say, “Our top competitors are A, B, and C. Here is how we compete with them. And here’s what it would take for them to take significant business from us.” The specific risks are not nearly as important as your knowing the risks.
3. Willingness to share your business’s bad news when it comes. Note the words “when it comes” rather than “if it comes.” If you do business long enough, there will be bad news. The worst thing that can happen to a banker is to get bad news that was totally unexpected. The loan officer does not want to ever say to the department head, “Gee, I never saw this coming.” Instead, the loan officer wants an early idea of trouble. He or she can tell the boss, “Company X’s sales were softer than expected last quarter. They think things will pick up, but we’re keeping an eye on it.” If the news gets worse, senior management will hear about it early and nobody is surprised.
One long-time business executive in my town is loved by every banker he has ever dealt with because they all learned that he would share bad news early. They trust him, and they lend to him again and again.
Business credit can be valuable, though I know plenty of successful companies that are debt free. Having the choice to borrow or not is wonderful. It’s a good idea to secure a business line whether you expect to use it or not. And the key to securing that bank loan is good numbers and giving your banker confidence that you know the business, you know the risks, and that you’ll share news whether good or bad.