In working with many small businesses in the middle Georgia area on a daily basis, I hear recurring questions. The most popular ones seem to be “Why can’t I get a loan?” Or “Why won’t my bank approve my request?” From that, it usually becomes, “My bank doesn’t want my business anymore,” or “This bank just doesn’t lend money.”
While Georgia banks struggled during the economic downturn, their basic business model remains the same. Their primary revenue driver is interest income from loans.
Banks simply must lend money 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 owners must become better educated to the new way of banking and the new way of borrowing.
Banks go through a process of underwriting to determine whether or not they want to lend money, and each loan opportunity is unique.
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.
- Make sure the statements are accurate. Get a bookkeeper or CPA to review them 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 and will give the lender the confidence of knowing that the borrower/owner is in control of the business.
- Learn what “Debt Service Coverage” means and how it’s calculated. Debt Service Coverage is the amount of cash available to meet debt obligations. An SBDC consultant can help you with this calculation.
- 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. The bank will want to know EXACTLY what the funds will be used for and why.
- Understand proper loan structure and/or terms. Again, an SBDC consultant can help you with this.
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.
(Source: Josh Walton, Area Director, UGA SBDC in Macon)