While Georgia banks have struggled, especially in the 2006 to 2010 time frame, their basic business model remains the same. Their primary, and by far their most significant, revenue driver is interest income from loans.
Banks simply must lend money in some form or fashion to survive. The State and Federal Regulatory Agencies have altered their ability to lend money, no doubt. So what does that mean for small business borrowers?
It means that small business borrowers must become better educated in the new way of banking, and the new way of borrowing. Quite frankly, many of the small businesses we work with at the SBDC offices throughout the state, are simply not prepared to borrow.
Banks go through a process of underwriting to determine whether or not they want to lend money, and each loan opportunity is unique. Lenders, simply put, are in the business of managing the risk for their employees, customers, shareholders and other stakeholders, each time they consider a request.
They do this by examining financial information of borrowers, holding personal interviews with borrowers, making site visits with borrowers, simply to gain as much knowledge as they can about the loan request.
Bankers are looking to assess 1) primary source of repayment, or, the available cash generated by the business/entity making the request 2) Secondary source of repayment by the business/entity such as collateral, other source of income/cash flow, or other guarantor/co-signer with assets or ability to repay.
As a former small business banker with both regional banks and local banks in Georgia for 12 years, I go back to my fundamental credit training I received from some very talented and experienced commercial lenders. I also take time regularly to visit and work with our middle Georgia bankers, learning from them, and assisting many of their customers in various areas of their business.
Please allow me to share some advice regarding the borrower/lender relationship, and how small business borrowers should better prepare for a loan:
• Establish a relationship with a lender. If one has not been established, start working on it now. The lending business is a relationship business, period.
• Provide accurate and timely financial statements, monthly, or perhaps quarterly, and most certainly at year end. Usually a Profit and Loss, or Income Statement, accompanied by a current Balance Sheet will suffice. In most cases, it is simply not enough to provide tax returns at year end.
• Make sure the statements are accurate, get a bookkeeper or CPA to review, if they are internally prepared.
• If needed, get some help to learn the basics of what a revenue item is, what an expense item is, what an asset is, and what a liability is. As a small business owner and potential borrower, having a general knowledge of this information could save the business; it will give the lender the confidence of knowing that the borrower/owner is in control of the business, and more importantly, that he or she understands how the business makes money.
• Learn what “Debt Service Coverage” means and how it’s calculated. It will be calculated by the lender, period.
• Provide a secondary source of repayment. If “hard assets” such as real estate or equipment or rolling stock aren’t available by the business or owner personally, seek help from another party that can offer collateral, or perhaps sign on the debt.
• Don’t expect the lender to bear all of the risk. A loan is simply an investment by a lender in the business. They do not want to own the business; they simply want their money back, with interest. Share in that investment with them. Anticipate the need for a cash or asset injection.
• Clearly demonstrate the purpose of the needed funding.
• Understand proper loan structure and/or terms. For example, money borrowed for hard asset purchases needs to have an amortizing term, meaning that the borrower will pay principal and interest payments from the start, reducing the debt as the asset depreciates. Money needed to acquire inventory, or provide short term cash to fund accounts receivable, should be on a revolving term, and should be paid back fully as that inventory is sold and cash is collected.
Finally, it is a much more difficult environment in which banks operate, and their standards for analyzing credit, grading and booking loans have changed. But it is a responsibility of each potential borrower to become more educated about what is now necessary to be considered a qualified borrower. Banks want to lend us money, we need to help them do it.
Josh Walton is the Area Director of The University of Georgia Small Business Development Center in Macon. He may be reached at firstname.lastname@example.org.