Obtaining a business loan can be a challenging task. There are a number of resources, however, that can aid entrepreneurs in their quest to obtain capital.
“Consultative resources can help entrepreneurs effectively develop a plan for their business,” says Thomas FitzGibbon, executive vice president for MB Financial Bank in Chicago.
Smart Business spoke with FitzGibbon about what type of resources are available, how they can best be utilized and the advantages of working with a bank that can underwrite and process loans locally.
What are some challenges that an entrepreneur might face when seeking bank financing?
The first challenge is that the entrepreneur must be prepared for a loan application. They need to have a business plan, a financial plan and a marketing plan that effectively creates a story that a banking institution can buy into. Entrepreneurs, by nature, are idea people, not necessarily financial gurus. They need to find a way in which they can translate their idea into a story that enables the lender to effectively underwrite the opportunity. A key word when talking about bank financing is translation: translating the idea or concept of a business promotion activity into a story that has both a financial look as well as an effective marketing strategy.
What types of resources are available to help entrepreneurs with the process?
SBA-supported and local business-supported organizations, often referred to as Small Business Development Centers, or SBDCs, and a variety of state agencies across the country provide operating support for organizations that help entrepreneurs prepare applications, business plans and marketing and financial plans.
Entrepreneurs need good financial guidance. Skilled professionals, such as accountants and attorneys, can help them access the appropriate resources. Also, in many cases, banking institutions sponsor and work with Small Business Development Centers and other entrepreneurial support institutions. For example, we work with ACCION Chicago. Such partnerships between community-based institutions help entrepreneurs align themselves with the resources that can help them be successful as well as help them through lending programs so they can obtain the capital necessary for them to start their business.
What type of credit-enhancement resources can be used to help obtain a loan?
There are state programs and, in some cases, municipal programs that can provide the credit enhancement necessary to reduce the risk. For instance, in the state of Illinois, the Department of Commerce and Economic Opportunity will participate in a loan that a local depository would originate; in other words, it will take a secondary position on the loan and in effect the lender gets paid back first. The state of Illinois also has a program called the Community Access Program, or CAP, that provides a credit enhancement by virtue of establishing a loan loss reserve. Both the SBA’s 504 Program and 7(a) Program are extremely good programs.
What are the advantages of working with a bank that has local underwriting and processing capabilities?
You’re able to deal with people that are making decisions right there rather than in some other part of the country. You are going to get more of a local view of the business potential, and you will have the opportunity to present alternative scenarios. Larger banking institutions are less likely than local institutions to look at finding alternative credit criteria, such as creating longer terms or establishing different collateral requirements.
How can entrepreneurs benefit from a relationship with a banking partner that can provide a single point of contact for loans, investments and resources?
Large banks tend to be more transactional in nature with entrepreneurs while local institutions and community banks tend to have more of a relationship feel. If I have your company in my portfolio and you are making widgets, and I know somebody else in my portfolio who is looking for widgets, then I’m going to do a referral.
One of the things that is very important in the relationship banking model is what I call the ‘Triangle of Influence.’ The top part of the triangle represents other businesses that can either use your company’s business or other businesses that are like your business that you can learn from. The second leg of the triangle is the legal community: What attorneys work in this space? We can refer people to attorneys while some attorneys refer entrepreneurs looking for access to capital to us. The third leg represents the accounting end of the business. So much of an entrepreneur’s success is built on whether or not he or she is adequately monitoring the accounting for the work he or she is doing. A local or community bank will use the Triangle of Influence to help an entrepreneur.
THOMAS FITZGIBBON is executive vice president for MB Financial Bank in Chicago. Reach him at firstname.lastname@example.org or (847) 653-1996.