By Ty Kiisel
I don’t think there’s a small business owner on the planet who doesn’t already know that credit is tight and finding the cash to fund working capital or fuel expansion isn’t tough. I’m convinced it’s one of the biggest single challenges faced by small business owners right now. Although most small business owners make their first stop at the local bank, only 10 percent of them leave with a check.
When you sit down with your banker, his or her job is to assess whether or not you’re a good risk. Most bankers start with the Five C’s of small business loan qualification. Knowing what the banker wants to know before he asks will help you better prepare for your visit to the bank. Think of it like watching the game footage of your opponents last game. Cervantes said, “Forewarned, forearmed; to be prepared is half the victory.”
- Character: Any banker worth his or her salt is going to be evaluating your character from the first few words out of your mouth. Some of what they’re looking for might be pretty subjective, but they’ll also be looking at your business experience and knowledge, personal and business credit history, references, and likely your education. Be prepared when he or she asks you, “How long have you been working in this industry?”
- Capacity: Your banker will want to ensure that your business has enough capacity to repay the loan. Pie in the sky estimates about what you hope will happen won’t help you get the loan. If you’re borrowing money to expand, for example, you’re going to want to have pro forma projections about your expected growth. You might also need to present contingency plans should your expected growth not happen. Your banker won’t extend a loan if they don’t think you’ll be able to pay back the loan.
- Collateral: To reduce the risk to the bank, they’ll often require some kind of collateral as an asset that can be used for repayment. Equipment, real estate, inventory, accounts receivables, and securities are often accepted as collateral. Depending on your history with the bank, they may even require a personal guarantee. Meaning that your personal assets may be required to make the banker feel more comfortable. This is particularly true for new business owners who do not have a track record with the small business lender. Although most banks don’t want to take your personal assets if you can’t repay your small business loan, they likely will if you default.
- Conditions: The banker will likely evaluate external conditions that might impact your ability to repay the loan. They’ll likely ask questions about how many customers you have, your competitors, what are your liabilities, and current economic conditions.
- Capital: Bankers like to know that you have skin in the game. They want to know your personal investment into your business. If you have personally invested money in the business it sends a message of confidence and your ability to repay. Your banker will be looking at your net-worth and equity as the two key financial metrics. Most of the time, if you aren’t willing to make an investment, neither will the bank.
You should also know that no two banks are exactly the same. Some banks might be better suited to your situation than others. You should be looking for a bank and banker that best meets your needs. Hopefully, being prepared will help you improve the odds of getting a loan.