Financing a business takes research, preparation and patience. No matter how small or large a business is, when meeting with a bank to secure a loan, business owners should be able to present plans, strategies and goals as clearly as possible.
“Throughout my years in banking, there have been many instances when a financing request has come in with a short turnaround need,” says Cheryl Madsen, vice president and senior commercial lender at Northwest Bank. “When there is a short window, it’s essential the business has a comprehensive financing packaging prepared.”
Smart Business spoke with Madsen about how business owners can benefit from improved communications with their banker as a way to enhance their business’ success.
What are the factors that banks use to determine whether or not to approve a business for a loan?
There are a number of factors banks use to determine whether or not to approve a business loan request. Some of the most critical factors evaluated in the loan approval process include:
■ A business plan that clearly outlines how the company plans to manufacture and distribute its products or services to its target market, along with any major events or plans for expansion or acquisition in the future.
■ A strong management team and a defined leadership succession plan.
■ Historic revenue performance with the ability to demonstrate sustainable cash flow.
■ Any applicable collateral should be detailed in the proposal, along with necessary financial statements containing a review of assets and liabilities, income and expenses.
Which of these factors challenges businesses and tends to keep them from getting approved?
Clearly outlined cash flow and collateral coverage are critical to any credit request. But at times when a bank asks for a personal guarantee, it can present an obstacle to business owners that can hinder the approval process. However, a good banker will step up and explain why a personal guarantee is sometimes necessary and help walk them through the process.
Pricing can also be an obstacle for business owners who request repayment terms longer than the industry average or are looking for other specialized pricing requests.
What can businesses do to improve their chances of being approved?
Businesses should keep the lines of communication open with their bank by providing them with a complete financial package and addressing any questions. Some business owners present only minimal information for the request.
Clearly communicated and complete information can help improve the chances of loan approval.
Business owners may also want to consider providing their bank with alternative solutions for funding. That can open the door to more flexible financing.
After being approved for a loan, what can businesses do to set themselves up for larger loans in the future?
It’s important for businesses to take time to find a bank that will partner with them and deliver a team-based approach for credit solutions, treasury and merchant services, and insurance needs. One–stop shopping is helpful, as these additional services can allow the relationship to grow.
Once a working relationship is established, businesses should maintain continued communication with their relationship manager and provide ongoing financial reporting. The more informed the bank is, the more likely it is that a loan request can be expedited.
The relationship between a business and its bank should show commitment from each side to help meet business goals. Remember to be as open as possible and find a bank that’s willing to act as an advocate, respond to changes in the business model and recommend solutions to optimize cash flow and help the business run efficiently. ●
Northwest Bank is Member FDIC
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