When a business is preparing to go to a bank for financing, there are often many questions. That’s why it’s important that a company feels comfortable with its banker.
“Just as it’s critical for a business to have a good relationship with its CPA and attorney, it is critical to have a business banker the company feels comfortable consulting with,” says Karen Mullen, vice president, Commercial Lending, First Federal Lakewood. “If that’s not the case, then the company may want to consider changing banks.”
Smart Business spoke with Mullen about the conversation companies should have with their banker ahead of applying for financing.
What information should companies have ready to start the discussion with their banker?
Banks always want to know how the financing will be used, so a company should prepare to talk about the project or capital investment ahead of the conversation.
A bank will likely want to see the company’s tax returns, its P&L and balance sheet. Depending on the size of the business, a bank might also ask for the business owner’s personal financial information.
What questions should companies ask their banker before applying for a loan?
Business owners should always review the loan terms, interest rates and fees, the payment penalties, approximate monthly payments, and the amount of down payment required. It’s also good to discuss the type of financing that would be best for the project, whether a loan or line of credit. Bankers can also help guide businesses through buy/lease decisions—when it makes more financial sense to lease equipment rather than buy it outright.
Why is it important for a banker to know a business’s future plans ahead of getting a loan?
It’s always helpful to a banker if he or she understands where the company is heading, because then he or she can help find the right financing to help reach that goal. A company’s banker should regularly ask about the company’s plans for the future, whether it’s three months or three years. That’s relationship-based thinking and helps ensure everyone is on the same page, which is advantageous to a business because it helps inform the banker’s decisions when it comes to products and advice. For instance, if a business owner is thinking about retiring in five years, buying a new building might not be the best move in that context.
How does having a conversation with a banker before applying for a loan ultimately help the company get the loan?
The more the banker knows about the company, the more comfortable they’re likely to feel with the company’s request and the smoother the transaction will be. While the client-facing banker in most cases is not underwriting the loan, they are communicating with the people who are making the lending decisions. When the underwriter has a question and the banker knows the answer, it makes the underwriter more comfortable making the decision.
When dealing with a local bank, the people making the decisions know the community and the assets, companies and people that are being discussed, which is extremely helpful when making a loan decision. Underwriters will likely be familiar with the track-record of a business—its successes in the community—and that informs the underwriting process. That’s typically not found in large banks where the people who make those decisions are often located out of state.
It’s important to have a trusted relationship with a banker, someone the business is comfortable asking for advice and suggestions about the best financial moves to make. Having a trusted banker means business owners can focus on what they’re passionate about, and know they have help with finding the financing to bring projects to life.
Insights Banking & Finance is brought to you by First Federal Lakewood
