Atypical loan application process can
seem daunting, confusing and time-consuming. But, if you know how banks make business credit decisions, you
can prepare your company for a seamless
process. The key is to know what your business needs to do to impress bankers.
“Right now, all banks are tightening up their
credit processes,” says Joe Garde, a vice
president in business banking with Fifth
Third Bank. “Given the current economy,
credit quality is a big issue for everyone.
Banks also want to be sure they are on top of
the customers’ credit situation.”
Still, the drop in rates might make this a
good time for businesses to renegotiate rates.
Do it right, you get the loan. Mess it up and
there is a much steeper hill to climb.
Smart Business spoke with Garde about
business credit decisions and how to prepare
for successful borrowing endeavors.
With lower interest rates, are banks more
aggressive or are they pulling back?
Regardless of the interest rate environment, banks will always want to do business
with creditworthy companies. But, it
depends on what a company is doing — how
its business is performing, the quality of its
balance sheet, and the profit and loss statements. Nowadays, with lower interest rates,
you will see many companies trying to refinance to a lower rate. Banks do in-depth
reviews and due diligence on the company,
assessing how creditworthy it is. If your business is doing well, banks will probably refinance. The market today is very competitive.
So, it might be prudent to shop other banks.
The bottom line is that if your company is
doing well, there is a good probability that
you will get your rate adjusted.
There seems to be more paperwork involved
than ever. True?
There is more paperwork since there is an
increased emphasis on due diligence at
banks. Banks ask more questions these days
on how the company is performing. They
want detail on year-over-year results and the
business environment. Banks want to understand the components of your business and
how they are changing. On the approval side, banks are being more detail-oriented to
ensure they understand how the company
and its management are performing. So, it’s
probably correct that there are a few more
documents to submit and sign. Some protect
the business, too — those that spell out loan
terms, interest rates and other conditions.
Is a written business plan required?
If you are a start-up, a detailed plan is
required. It should set your mission statement and objectives and include a narrative
of assumptions. For an established business,
it is still good to have a business plan for the
year ahead — something that includes the
balance sheet — P&L statements, cash flow,
etc. But a good narrative is a plus.
What ratios and other factors are important?
Banks like to see details on sales, cost of
goods sold, operating expenses broken
down by salaries, advertising, utilities, etc.
Banks like to compare the past years to projections. Projecting 30 or 40 percent increases in sales usually is not reasonable. But you
might anticipate growth due to adding a
new customer or new territory. Spell it out
so the bank gets a better vision of how you see the coming year. Remember, it’s not
always the numbers that banks need but
also the ‘why’ behind the projections.
Relative to ratios, banks look at balance
sheet ratios such as current ratio and leverage. Other important ratios are debt service
coverage and fixed charge coverage.
At what other things do banks look?
Banks typically run a credit report on the
owners. Banks like to see owners’ credit
scores. Typically, the way they conduct their
personal businesses is the way they run their
companies’ businesses. Banks do lien searches, looking for lawsuits against the company
or lien on assets to make sure the company is
current on all of its taxes. Banks want to be
sure there are no surprises.
Should I work with a downtown banker or my
If you are looking for a smaller loan, something under $150,000, a branch manager will
probably better serve you. When you’re talking upward of a quarter-million or half-million
dollars, getting a business-banking professional involved is better. They have more
expertise and will consult with you on the
overall financial needs of your business.
Who sets the interest rates and terms on
loans? Are they negotiable?
Banks set rates based on the credit quality
of the customers and their banking relationships. Everything is negotiable, especially if
banks are competing against one another.
Once banks get all the financial statements
for the company and the guarantors, it generally takes 10 to 15 business days to get a
loan, which includes underwriting, approval
and documents. In situations that might
require a real-estate appraisal and an EPA
Phase I, the process will probably take
longer. As long as banks have all the information in hand, the process is smoother and
JOE GARDE is a vice president, business banking, with Fifth Third Bank. Reach him at (513) 861-4983 or Joe.Garde@53.com.