As dictated by their tightly regulated industry, banks are required to maintain certain ratios. If the asset quality of a bank has been adversely affected during the last few years, chances are, it will be limited in soliciting and acquiring new loans on its books due to regulatory capital requirements as well as loan loss reserve requirements.
Even though the current administration is pressing banks to increase their lending activities, maintaining the required ratios is an inevitable barrier that’s keeping some banks from lending. Unfortunately, the banks do not have many options. They can raise capital by retaining earnings, perhaps by reducing or eliminating dividends, if they make money; sell stock, which will dilute the stock and upset the current investors; or reduce their outstanding loans.
“Interestingly enough, we have not been seeing a great demand for loans, due to the fact that many businesses are not expanding, investing into capital expenditures or increasing inventories,” says Sinem Mehterian, a vice president and relationship manager at Wells Fargo Bank. “And in the commercial real estate market, everyone is expecting to find a great deal, so we see limited transactions.”
Nevertheless, the market is rebounding and morale is improving. Because of this, now could be as good a time as any to apply for that loan to replace that older piece of equipment, buy that building, hire more man power, buy more raw materials or inventory and/or make more products. But, you have to be prepared and approach the banks in the proper way.
Smart Business spoke with Mehterian about lending in today’s environment and what businesses can do to position themselves for successful borrowing.
What are the biggest mistakes business owners make when applying for loans?
There are several mistakes businesses make when applying for a loan, including:
- Withholding personal guarantees. If the business owner does not trust his own business, why should the banker? A personal guarantee shows the bank that you’re willing to share the risk.
- Providing an incomplete and/or inaccurate application package and not correcting or providing the needed information in a timely manner.
- Not knowing your personal and business credit rating. Before even going to a bank to ask for an application form, make sure you know where you stand, especially in this environment where fraud is prevalent.
- Making a loan request without a clear explanation of the intended use of funds. Banks want to see that you know exactly what your needs are and how a loan will meet those needs. Also, don’t ever ask for ‘the most I qualify for’ on an application.
- Applying only to the most convenient lender or just at your current bank. Shop around at two or three banks, but don’t go overboard and drop an application at every single bank.
- Failing to offer some form of equity or collateral. Again, you want to show the bank that you’re willing to share the risk.
- Not having a team of good advisers, including CPAs, attorneys, business/commercial bankers and specialized insurance agent/brokers, that understand your business model and will help you minimize risk. You can’t do it all on your own.
- Not having a solid business plan and realistic projections. Be prepared to show what you will do in the best, probable and worst case scenarios, especially when it comes to startups and for SBA expansion loans. An SBA guarantee does not mean that banks will make loans that do not make sense.
- Having no experience whatsoever in the field in which you’d like to start a company.
What qualities should business owners look for in a bank?
First is the bank’s ability to lend. Check the FDIC, OCC and Federal Reserve websites and take a look at the bank’s recent financials, read the news about the bank in the media, and seek out other business owners’ opinions. Next, determine what different financial products and services the bank can offer that you could use now, as well as in the future. Are you going to have to find another bank in a couple of years because the bank has limited services, cannot offer solutions for FX hedging or letters of credit, and/or is expensive or antiquated when it comes to online banking or treasury management solutions? What’s the banker turnover? Will you need to keep re-establishing your relationship and explain what you do and what you want to accomplish over and over? Does the bank bring in a team of professionals to turn business challenges into opportunities?
Should a borrower disclose both the good and the bad when applying for a loan?
Definitely, your banker should know everything. If it’s a cyclical business, the bank can look at the future outlook and projections. It can also analyze how you did damage control. Did you ignore the fact that the business was failing, or did you put strict measures in place in a timely manner to cut expenses and return to profitability? Regardless, a bank can almost always look for alternatives such as asset based lending, factoring or purchase order financing if it makes sense.
How often should business owners consult with their commercial lenders?
You should consult with your commercial lender regularly. A good banker will understand your business, its operating cycle, its challenges and opportunities, and its risks and cash flows. Good bankers provide reliable guidance and appropriate solutions.
Sinem Mehterian is a vice president and relationship manager at Wells Fargo Bank. Reach her at email@example.com or (281) 362-6657.