If you’re tempted to visit a local bank to get a loan quickly, here are three basic issues that improve the probability of success when a commercial loan is needed.
- Common types of borrowing
Most often, customers seek financing for two things: a new piece of equipment or working capital.
The new equipment can be justified if it will improve efficiencies or allow the business to attract new customers through a new product offering. In either case, the goal is to increase profits. Show the banker the impact.
Working capital needs are less obvious and just as essential in most cases. Working capital is the operating liquidity available to a business and can involve the conversion of assets to cash, which may be slow or seasonal.
Decisions on the management of inventory, A/R, and A/P also lead to short-term lending requests. Know your conversion cycle in terms of the number of days.
- Welcome vs. Rejection
The circumstances leading to the approval of a loan request require a prepared business owner. He/she must be able to “tell a story” about the business: know it inside and out; know the competition; how to differentiate on performance, price, service and other basics.
And, most importantly, know the numbers — cost per unit, projected sales, budgets, lease vs. purchase scenarios and other metrics. The business owner must be a salesman without being overzealous.
A rejection comes pretty fast with the opposite scenario from the aforementioned. The lack of preparation and not knowing the plan and budget can yield a fast rejection.
A request is dead on arrival if the client comes across as too pushy or has an entitlement attitude that results from acquaintances with board members or others associated with the bank. Those acquaintances will not suffice for the lack of preparation.
- Qualities of the lender
The business owner should discern common ground on personality with the lender. He/she needs the banker to be an advocate for the deal and “catch the dream.” This is important because most larger requests go to some form of loan committee.
If personalities clash, the lender may be less enthusiastic about being the champion for the deal.
Also, the owner wants a banker who has expertise in the area of need. That is to say, avoid taking a commercial loan request to a consumer lender because two different methods of underwriting are required.
Finally, the owner needs to get to know the banker. It is all about developing a relationship. Really, the best thing to do is get to know the banker before you need something.
It is a best practice to take your business plan into the banker and ask for their review and advice in advance of your formal application. Make sure to include references — both personal and business. This will help the banker discover your credibility quickest of all.
Jeff Patterson is the area director of the Georgia State University Small Business Development Center (SBDC). He may be reached at 404-413-7830 or jpatterson@georgiasbdc.dream.press.