Whether you need to borrow $1 million to launch a company or $5 million to take your business to the next level, communication is the key to a
strong lending relationship with your bank.
How will you pay back the loan? What variables in your industry and business affect
your balance sheet or income statement
and, therefore, your ability to comply with
loan covenants?
“Competition among banks is fierce, and
that is good for business owners who want
to borrow money,” says John Falatok,
executive vice president for commercial
banking at Sky Bank in Akron.
Still, the current regulatory environment
can shut you out of securing a commercial
loan if your credit grade slips below a certain level. Without a trusting relationship
with a loyal bank, a bad year could significantly reduce your ability of obtaining
financing to fund a comeback.
Smart Business asked Falatok to discuss
how you can position your business for
successful borrowing.
What is the biggest mistake business owners
make when applying for a commercial loan?
When launching a business, entrepreneurs tend to underestimate the amount of
money it will take to get the company up
and running. Think of your business as a
boat. Make sure you have enough fuel in
the engine to get across the lake, because
it’s tough to get gas to the boat if you’re out
there drifting.
In business, you need enough capital to
make it through the first couple of years
— so plan ahead. Banks like to look at historical earnings. Even if you have a great
business plan and the bank lends you
money, if things don’t go well the first 10
months — and often they do not — the
bank probably will not agree to lend you
more money.
What qualities should business owners look
for in a bank where they are considering
applying for a commercial loan?
Look for a bank with a consistent lending
philosophy.
One way to know is to ask about historical write-offs. Significant swings in loan
charge-offs over a number of years may be
an indication of inconsistent lending policies. Another important factor is to look
for consistent personnel. Usually, a bank’s
lending philosophy will be steady and reliable if there is low manager turn-over. If
you discover that a bank lacks these consistencies, you may run into trouble down
the road.
What about loan covenants?
In today’s environment, especially with
loans of $2 million to more than $50 million, banks generally have loan covenants.
This is a promise between the bank and
the borrower, whereby the borrower will
produce certain operating results. If the
borrower’s performance is not in accordance with the covenant, the bank can
consider the loan in default and has the
right to demand payment or deny future
loans.
Covenants are important to banks so
they can stay up to date on borrowers’
financial status and assist them if there are
activities in the business that could be
changed to improve the borrower’s status.
But be careful not to enter in an agreement with unrealistic expectations or with
severe cost penalties for slipping slightly
below covenant requirements. Leeway is
important.
Should a borrower disclose the good and bad
to your bank? Will a bad year or industry
downturn prevent a business owner from
securing a loan?
Most veteran bankers have been through
up-and-down times, too. They understand
that the economy, a cyclical industry and
other variables can affect a company’s borrowing power. Don’t be afraid to communicate the good and the bad. If you want to
find out if your banker will be loyal to you,
ask this hypothetical question: If we posted
a small loss, what would be your reaction?
You want a bank that won’t overreact when
business doesn’t go exactly as planned.
At the same time, you should be willing to
share information and discuss situations
that negatively affect your ability to make
loan payments. Lend insight on why the
numbers aren’t as strong as you hoped so
your banker understands the market conditions your company faces.
How often should business owners consult
with their commercial lenders?
Quarterly meetings are always a good
idea — or at least twice each year if you are
borrowing less than $5 million. Send your
lender quarterly financial statements and
write a cover letter that updates him or her
on the status of your business and initiatives to improve profitability if your numbers are lower than expected. A bank will
look positively on a company whose
owner reduces salary or distributions to
invest all possible cash flow into the business. Always remember, if your business is
in a volatile time, the more you communicate, the better.
JOHN FALATOK is the executive vice president of commercial
banking for Sky Bank in Akron. Reach him at (330) 258-2356
or [email protected]. For more information, visit
www.skyfi.com.
