|
Chasing money continues to be the biggest drag on the time of the
small business owner. You are either chasing customers or getting the
runaround by banks. Be aware, all banks and non-banks are NOT alike.
Understanding a bank’s “appetite” for loans can save you a lot of wasted
time, energy and frustration. 
|
|
Business Financing – The Big Picture |
 |
In 1980, commercial banks provided approximately 80% of all small
business loans. Today, commercial banks handle about 16% to 18% of all
small loans. What happened?
Competitive differentiation is the key
to survival. Banks have had a difficult time differentiating themselves.
After all, money is money. Or is it? Banks and non-banks have three key
areas where they can differentiate.
- Rates: the amount of interest charged and related fees
- Geography: the size of their geographic lending radius
- Underwriting: the specifics of what qualifies as an acceptable loan
request
Areas 1 and 2 are less important. Most interest rates
are governed by the market. A bank will charge as much as it can until
customers object and go elsewhere. A bank’s lending radius differentiates
one bank from another but it only matters once you are a customer. It’s a
convenience issue. Unfortunately, multiple locations mean little when it
comes to approving your new loan request. Underwriting policies are the
key differentiator amongst business lenders. Underwriting policies are
what cost banks their dominant market share of the
1980’s. Underwriting and Specialized
LendersUnderwriting, in its simplest form, is the level of risk a
lender is willing to take within any industry. As banks declined many
higher risk or specialized loans, specialty lenders began to emerge.
Specialty lenders reasoned if businesses couldn’t find a bank to satisfy
their needs, they may be willing to pay more to that lender. Therefore,
specialized lending resulted in premium rates, which more than offset
potential losses. Specialized lenders gained a significant
experience factor within specialized industries and loan types. Over time,
they became very adept at measuring and controlling risks. As these
specialized lenders began to thrive, more and more new competition entered
the market until banks were fighting to stay afloat. Did you know
that no two SBA Lenders are the same? Each lender that participates with
the SBA Program has to meet the same “borrower eligibility” guidelines,
i.e., size of business, for-profit status, and so forth, but each lender
is allowed to develop their own Underwriting Guidelines. Therefore, you
could take your SBA Loan Application to five SBA participating lenders
(banks and non-banks) and get five different answers. Two may decline the
loan for different reasons while the other three might approve the loan
but offer substantially different loan amounts and terms.
|
|
Improve Your Chances – Be Prepared |
|
Before you approach a lender with a formal request, do your homework.
Many junior level bankers (business development people, branch managers)
will tell you everything looks great only to have the loan committee turn
down the request because it doesn’t meet any of their underwriting
criteria. Call a senior level lender and ask if you could run your request
by them verbally so as not to waste their time. Have the following details
handy:
- Tell them exactly what your business sells and who your customer is.
- Is your personal credit good? You will be required to personally
guarantee the business debt.
- Are there any liens, judgments or business credit issues that will
be discovered during the bank’s credit review? Put them on the table.
- If you own any real estate, document the estimated market value of
each parcel and the existing mortgage balances, including home equity
lines, or if any of these parcels are currently pledged as collateral
for another loan. Good real estate equity negates many smaller
underwriting mismatches. Lenders will use as much real estate collateral
as they deem necessary to secure their loans. Be prepared to offer it.
- If there is anything about your business that represents an
environmental risk, i.e., underground storage tanks, chemicals, oil
drums, etc. If so, tell them up front.
- Have your business revenue trends been stable, increasing or
declining?
- If revenue trends have been declining, can you demonstrate that
sales levels have turned around? Is there a good explanation for the
decline – loss of a key account that has been replaced, acts of God,
temporary local construction. These are all reasons a banker will view
as understandable.
- From your tax returns – did your company make a profit last year?
How about the year before?
- How much do you need? How did you determine the loan amount? Why are
you confident you can pay it back?
- If you are refinancing another loan, have the loan balance and
monthly payment information available.
If the lender is okay
with the above information, move to the next step – creation of your
business plan. Business Plan OverviewAt a minimum, your
business plan should contain the following information.
- History of company – two or three paragraphs
- Products and services offered –two paragraphs
- Customer advantages – location, hours of operation, price, service,
product mix, quality, etc.
- Market served – areas of specialty
- Competition – one paragraph – How many? What is your advantage?
- Operation overview – key positions. Staffing and hours of operation.
- Cost reduction and/or revenue enhancement – where are the
opportunities? How and when will they be implemented?
- One year month-by-month projection of sales and expenses
- Key assumption page highlighting any changes in revenue and/or
expenses from historical levels
In addition, you will need to
attach copies of the following documents:
- Company’s Federal Tax Returns for the last three years -- all pages
signed by owners
- Personal Tax Returns for the last three years – signed by owners
with 20% or more ownership of company
- Personal Financial Statement (assets and liabilities) for each owner
- Interim Current Year Profit & Loss Statement and Balance Sheet
within 45 days
- Aging of Accounts Receivable and Accounts Payable as of Interim date
- If sales are seasonal - 12 month trailing sales summary with
explanation on any revenue changes
- Copy of executed Purchase Agreement if the request is to purchase
real estate or a business
Let BizMACH Assist
YouWe utilize over 130 national lenders including banks, non-banks
and private sources because no two businesses are alike and no one lender
has everything our clients need. We use 18 different SBA Lenders because
only three will do hospitality loans, four will do marinas, six will do
restaurants, five use cash flow formulas instead of collateral formulas in
calculating loan levels, etc. Let us assist you.
|
|
Coming In The Next Issue |
|
Don't miss the next issue of Exit for Success. Our topic is:
Understanding Costs, Profits, and Cash Flow
Use the link
below to read previously published issues.
BizMACH is an
association of highly skilled consultants, evaluation experts and merger
and acquisition specialists. We take ordinary companies and create
extraordinary value. Best of all, we only work with lower mid-market
companies.
Competitive advantage is the key to revitalizing your
company's growth and profitability. Call us if you'd like a free
consultation and to learn how BizMACH can grow your company and increase
its value.
If you're not working with BizMACH, you're not using the
BEST.
Business Evaluation and Salability
Tool
Tom Long
Solid Oak Consulting,
LLC
522 South Elmwood Ave
Oak Park, IL
60304
708-524-0886
telong@solidoakconsulting.com
Executive Associate
Accredited by the Institute for
Independent Business
| Quick Links... |
|
|
