If you’re in a position to grow your business to the next level and you need working capital to make that happen, you may be worried about your ability to receive credit. But banks today are extending loans and lines of credit to businesses that have a solid track record, a strategic plan in place and a strong relationship with their bank, says Don Pilmer, executive vice president of Old Second National Bank, Aurora, Ill.
“What has changed in banking over the years is that many community banks used to be able to do business based on relationship and reputation,” Pilmer says. “A longtime customer could say, ‘You know my business is good for it, we’ve been around for 20 years,’ and sometimes that was enough for a community bank that really knew that customer and the company well.”
With heightened regulatory lending requirements, “Underwriting is much more stringent in today’s world than it has ever been,” Pilmer says, citing the mortgage industry fallout and economy as factors.
That said, banks are eager to do business with commercial customers as government stimulus programs and various elements of the Small Business Jobs and Credit Act of 2010 will improve access to capital.
“The government is doing what it can to stimulate activity, and there are various SBA initiatives that are supporting expansion of existing businesses and allowing for some fairly attractive financing initiatives,” Pilmer says.
Smart Business spoke with Pilmer about how business owners can position their companies to secure loans and credit lines in today’s stricter lending environment.
What are banks looking for in a borrower?
Banks are always interested in doing business with borrowers who show that they have a strong handle on where their businesses are going, what they need to do to succeed and what risks they will confront.
Sure, banks appreciate optimistic owners who see bright, profitable futures for their businesses and need the working capital to reach goals. This type of entrepreneurial spirit is what keeps small businesses going and, as a banker, it is refreshing and gratifying to work with ambitious people.
But banks also want to know that owners have developed a plan for how to manage the downside, that they have analyzed the risks, the worst-case scenarios and the what-ifs, and how to manage those scenarios. Banks would also like to see the owner’s plan for how he or she will turn the business back toward the goal if things don’t go as planned.
What should businesses be doing to get their bank loan/credit line paperwork in order?
The best way for a borrower to impress a banker is to be prepared. Assemble a detailed application package, which should include three years of financial statements and tax returns and, depending on the time of the year, financial projections to finish up the present year. It’s also helpful to furnish two years of financial projections or more.
Plan to supply personal financial statements of owners with supporting documentation, and create a summary of the request and how the loan/credit line will be applied to help grow the business and make it more profitable.
Ideally, this information should be organized into a single package, as opposed to bringing a banker financial statements and promising the rest of the information ‘next time,’ or saying, ‘I have tax returns, what else do you need?’ Anticipate what financial information the bank will ask for and bring all information to the table at once.
This helps make the credit application process or renewal process much smoother.
What common mistakes do business owners make when applying for a loan/credit line?
Don’t take the process lightly, and be realistic about how you will manage the downside. In today’s world, cash flow and credit-worthiness are two keys to securing a loan/credit line, and you have to prove that you can support and service the debt.
If you have historical financial statements and projected financial statements that show you can’t service the level of debt you are requesting, that makes it difficult for a banker to get an approval. Even if you have a history of always making payments on time, if you cannot provide financial support and documentation to justify a credit decision, a bank will have a tough time extending that opportunity in today’s market.
What else should business owners know before trying to secure a large credit line or other large-scale financing?
Banks are looking to develop strong relationships with their business clients because it’s important for us to be much more than a commodity supplier of financing. At the same time, businesses must understand that banks are taking on risk by approving loans/credit lines, and borrowers have a responsibility to service their debt. That’s why business owners need to communicate openly with their bankers and share both good news and bad.
Bankers are trusted advisers who can provide business tools and referrals to other professionals who can assist borrowers if they experience tough times. Both parties have a vested interest in borrowers’ success: Businesses want to grow and profit; and banks want their customers to reach their goals and fulfill their financial promises.
Don Pilmer is executive vice president at Old Second National Bank in Aurora, Ill. Reach him at (630) 844-8750 or firstname.lastname@example.org.