Is there a credit crunch? Based on the
formal definition there is, because
lenders are exercising much greater caution before granting business loans. However, banks actually have plenty of money
to lend to qualified and well-prepared borrowers. While there’s definitely been a
trickle-down effect from the mortgage
industry, causing lending institutions to
scrutinize business loan requests more
carefully, CEOs can still secure funding by
understanding the tighter requirements
and using a more pragmatic approach to
the market.
“It’s not that banks aren’t lending money,”
says Jim Paul, senior vice president for
retail administration at Fifth Third Bank
(Tampa Bay). “CEOs need to have a better
understanding of what banks are looking
for and what’s behind their lending decisions because there’s more need for due
diligence and preparation when applying
for a loan.”
Smart Business spoke with Paul about
the current lending criteria and how CEOs
can successfully secure business loans.
What are banks looking for when evaluating
loan requests?
Out of all the criteria, the most important
is cash flow. If the banker doesn’t think the
borrower has enough cash to service the
debt, the request stops right there. They
will also factor in the debt service costs
when evaluating the company’s cash flow
requirements and project whether the business will produce enough cash to make the
payments over time. Many borrowers think
that collateral can overcome cash flow
shortfalls, but collateral doesn’t make up
for shortfalls in cash. Banks are really not
interested in taking over assets if a business fails to make its payments, so right
now cash is king.
What else are lenders reviewing?
Lenders will review credit scores and
how the borrower has historically used
credit facilities. In privately held companies or partnerships, the personal credit
scores of the owners will be reviewed, but the lenders will also be looking to see if the
borrower has been using funding vehicles
appropriately. For example, a line of credit
is designed to meet short-term needs, such
as paying bills or meeting payroll to bridge
gaps in receivables. These funding vehicles
were never designed for business expansion. So if the owners have been using
credit lines for expansion purposes that
will be a red flag to the lender.
Are intangibles reviewed?
Character is definitely the third thing
lenders will review. It helps if you have a
relationship with a bank, but if that’s not
the case, the lender will look at the industry, the owner’s history, experience and
reputation and how you approach the institution when requesting a loan as a gauge of
your character and professionalism.
How can CEOs prepare before approaching a
bank?
First, you’ll want to meet with several
bankers to gauge the market and understand what lenders are looking for
because having greater knowledge of the
lending side will help you tailor your presentation and business plan to meet the
requirements. The discovery process will
also help you estimate both the type of
loan and the loan amount your business
will qualify for. Rates are still at an all-time
low, but lenders are charging more for
increased risk, and they are looking at
worst-case scenarios to see how the borrower and the business might fare under a
variety of conditions.
For example, if you’re applying for a loan
to purchase property, you might need to
secure key person life insurance to secure
the loan or present your collateral and
cash flow in a way that’s on target with
what the lender is seeking. Let the lenders
know exactly what you’ll be using the
funds for and allow them to get to know
you and your business, so they’ll be comfortable lending you the money.
What’s the best way to approach the lending
institution?
The most successful strategy I’ve seen is
where business owners approach a lending
institution in partnership with an attorney
and an accountant. You’ll also need a customized business plan tailored toward the
lender’s requirements. It adds a great deal
of credibility when a team of professionals
collaborates in authoring and presenting
the business plan, and a joint presentation
makes lenders more comfortable because
accountants can often address questions
about cash flow and how the funds will be
used. Borrowers can tap local resources,
such as the business department at local
universities or the Small Business Administration to help author a business plan if
they can’t afford to partner with a local
accountant and attorney. In today’s environment, success is commensurate with
taking the time to understand the market
from the lender’s perspective and then
crafting your approach in such a way that
it addresses all the lender’s concerns.
JIM PAUL is senior vice president for retail administration at Fifth Third Bank (Tampa Bay). Reach him at (813) 306-2511 or
[email protected].
