Commercial banker recommends developing a relationship with a lender, doing your homework for the smoothest and quickest possible approval process.
For businesses in need of funding for capital improvements, now is a good time to seek long-term business loans, says Tampa-based Valley Bank Commercial Banking Manager Ron Ciganek.
Why? Because there's a narrow interest rate gap between short-term and long-term loans, Ciganek says, which makes the market ideal for borrowing for growth.
But that doesn’t mean the money comes easy.
Business owners still must be fully prepared to demonstrate historic and future revenue streams to ensure a successful loan application outcome.
Ciganek says lenders will typically require three years of financial statements from businesses. To borrow $5 million or more, they’ll likely request CPA-audited statements, perhaps an even longer history for cyclical industries.
“We were working with a company in the construction industry for financing, and they brought 10 years of records, showing they were able to stay profitable through the economic downturn,” says Ciganek. “That was very helpful.”
A favorable P&L statement is also crucial to securing financing. Ciganek says a common mistake made by businesses and their accountants is producing a balance sheet that demonstrates taxable income.
“Too many times people take a tax avoidance strategy, so the challenge is when you eliminate taxable income you also eliminate the opportunity to borrow,” says Ciganek. “If you are too aggressive in managing your business to minimize taxes, you won’t show the cash flow necessary to successfully obtain a loan. It's important for the banker and the CPA to talk without a client in the room so things can get done in the right way to benefit the client. We do have a lot of mutual relationships and have the ability to talk to the CPA firm and to make sure what we are doing and what they are doing achieve a common goal.”
Companies seeking funding to support capital expansions such as adding manufacturing capacity or purchasing fleet vehicles should present a solid plan that covers one, three and five years into the future. Ciganek says the first year’s plans should be tangible and, moving toward five years out, should include best estimates for growth and financial need.
“As an example of how this approach can be beneficial, we work with a disaster recovery company that helps clients deal with issues like fire, flooding and other damage,” Ciganek says. “The firm embarked on an acquisition growth strategy by first engaging an investment bank to determine targets, then by working with us to structure a line of credit to support the acquisitions. It was all supported by a solid business plan.”
Options for business funding include a working capital line, which can help fund payroll growth and more; a fixed-term loan to support financing of equipment or vehicles; a mortgage or lease for a business location; and loans to support acquisitions of other companies.
Because possible needs are diverse, Ciganek recommends developing a relationship with your banker before you need one. Although commercial bankers will prospect for clients, much of their lending business results from a relationship basis as opposed to a transactional basis.
'If you are too aggressive in managing your business to minimize taxes, you won’t show the cash flow necessary to successfully obtain a loan.' Ron Ciganek, Valley Bank
“Sometimes I get a text from a client saying they need $1 million, and sometimes it’s a client asking me to come to their business to see what they have going on,” Ciganek says. “Other times they’ll have friends who have a relationship with a bank and they come with a referral. It’s easier and more efficient if the lender knows everything going on in a customer’s world. The more we’re aware of the operations, owners and industry, the better we can do in getting accurate pricing for the loan.”
What about a business owner who follows all recommended protocols and is still turned down for a loan? Ciganek says it’s important to get a fast rejection if a certain option isn’t going to work.
“Don’t let a lender string you along,” he says. “If one option won’t work, quickly talk about alternatives, which could be anything from working on ways to better qualify to thinking about other funding sources. On average, we often spend two to three years working with a prospective customer before they move their business to us, so it’s important to have frequent touch points during that time frame.”
Also important is seeking a lender who demonstrates flexibility. For example, Ciganek says he has financed royalty payments on a patent.
“It had a cash flow stream from patents and it was easy to demonstrate,” he says. “For a lot of people, we provide lines of credit on existing collateral, but where there is viable cash flow there is leverage.”