With new regulations and tight lending, bank financing has only gotten harder to secure. Follow these steps to improve your chances of approval.
In working with businesses to find them financing, when they are unable to obtain it from a bank, I get asked frequently, “why did the bank decline me?” or “how can I qualify for a bank loan?”
Getting a bank loan approved is not the easiest process. In light of recent economic troubles across the nation, lenders are looking for a lot more in a loan applicant and are stricter about loans they approve.
Applying for a business loan can be intimidating and stressful, and it can be confusing to have an application rejected with little explanation. The following are five steps you can take to avoid some of the possible confusion and to develop a more positive experience while applying for a business loan.
1) Research Potential Lending Institutions
To stand the best chance of succeeding with your loan request, it will help to approach a bank that is familiar with your industry and target market.
Like any business operator, financial institutions want to make money. While they want to lend money, they don't want to approve credit that will ultimately result in loss. Furthermore, regulatory requirements often influence the types of loans that can be approved.
It is a good idea to do some basic research on the financial institution you're considering before walking in and applying for a loan. Not every loan fits every bank's criteria, so you might be applying for a business loan with a bank that only does financing against real estate.
A national bank is less likely to hear you out if your business hasn't been profitable the last three years. It is also likely that you will be declined if you lack sufficient collateral to secure a loan. It might be better to visit a community bank and also inquire about SBA loan programs. Since up to 80% of a business loan can be guaranteed by the government under the SBA program, some banks may be more lenient.
2) Get your Financial Documents in Order
Having a professionally presented loan package goes a long way. Lenders like it when the information is readily available to them. Also, make sure the information presented is true and accurate. Inconsistencies and mistakes can cause a lender to lose confidence and become apprehensive on approving the request.
A standard loan package should include two to three years of business and personal tax returns, year-to-date profit and loss statements including an interim financial statement and personal financial statements of all owners owning more than 15-20% of the company. Depending on the type of loan additional documents may be required, i.e. business plans, projections, account receivables and accounts payable aging reports.
3) Tell your Company's Story
Having a brief summary prepared that highlights your company, the owners, achievements, etc., helps the lender feel more comfortable about with whom they will be doing business.
When meeting with the lender, present a positive and professional demeanor. Be prepared for a variety of questions and make sure you can back up all of your loan application claims with facts. You are selling yourself, your confidence in your business plan, as well as your ability to make good on your loan. Communicate clearly how much money you need, what you intend to use it for and exactly where the business loan will be allocated (to buy equipment, new facility, staff, marketing, etc.). Prepare your repayment plan and be sure to include it in your documentation.
4) Know your Numbers
If you are pursuing a loan, you should already be aware of your credit history and current FICO scores. The bank should tell you the range of credit scores required for loan approval. Most banks look for an average FICO score of 650, some might go lower, some higher. Plan ahead and request a copy of your credit history and score several months prior
to your application. Review your reports for accuracy and give yourself time to correct any errors. Lenders today will rely heavily on your past usage of credit.
The minimum debt service coverage ratio (DSC) is 1.25x. That is also the minimum global debt service ratio. Cash flow and profitability are very important in underwriting. It's a borrower's ability to repay the debt. If the DSC isn't there, typically the deal will not be approved. Sometimes banks like to include leverage covenants, such as debt to worth, to keep owners from taking too much equity out of the company.
Keep in mind if you are applying for a line of credit, most banks require 30 days resting period (line at a zero balance) for every 12 months. If at renewal you didn't obtain that, then the line of credit probably will not be renewed and termed out for two to three years.
5) Have the Right Expectations
Applying for a loan when you are in a hurry is never a good idea. Loan officers have a certain protocol for approving a loan and getting you the money. During the process, make sure to discuss the sequence of events so you'll have an idea of when to expect an answer.
On a final note, it costs nothing to talk to your local SBA, SBDC or SCORE counselors. Each has experts on hand to help you navigate the loan approval process; it's also likely that they will have their fingers on the pulse as to which strategies work well and which banks might be the best to approach based on your scenario.
There are financial consultants and brokers who also can help with finding bank financing, but they will usually charge a fee. The fee should only be paid if they find you the financing and at the loan closing. This helps save you the time and effort in trying to find the right bank and they have the expertise in putting your loan package together, writing the summary and knowing how to present the loan request to the right banks that would be interested in your deal. They usually know what the banks expectations are and can address the concerns upfront that the lenders might have.
Cheryl O'Neill Gowen is president and CEO of Alternative Funding Options. She works with business owners seeking cash flow from non-traditional sources, drawing on more than 30 years' experience in banking, financing and staffing. Contact her at: [email protected].