Five Steps to the Loan you Need
by Tim Jones, EVP, Commercial Banking Regional Manager
Puget Sound Business Journal – Arguably, one of the keys to economic recovery is the growth and profitability of small to mid-sized businesses, many of which require loans to ensure they prosper. But are banks lending? The answer is yes and the time is now.
April and May are ideal months to approach potential lenders because financial statements from the previous year should hopefully be complete. Up-to-date financial records are a timely and accurate means for a potential lender to evaluate the health and financial condition of any organization.
As tax season comes to a close and businesses have financial statements at the ready, here are five areas that small- and mid-sized businesses should thoroughly understand when they approach their banker for a loan:
First, understand the true reasons why you’re at a point where your business needs financing. Is it inventory growth, an inability to collect on accounts receivable, fixed asset acquisition or something else that’s eating away at your cash flow balances? It is important to understand ‘why,’ so that you can communicate it effectively to a potential lender.
Second, be sure to provide your banker with a specific dollar amount for your loan request. Don’t ask how much you can borrow or ask to borrow as much as you can. An experienced lender will see those types of requests as a red flag. Instead, approach your banker with a precise figure that will genuinely meet your requirements. By doing so, you’ll show that you fully understand what’s driving your need to borrow money and make it more likely that you will receive the loan you’re requesting.
Third, come prepared to identify a payback strategy. Many bankers like to quote the old saying “profits cure a lot of ills but cash flow pays the banker’s bills.” Be prepared to tell your prospective lender specifically how your business will generate the cash flow that will pay back your loan. This demonstrates that you have a solid understanding of the loan process and control of your ability to repay. Be realistic. If your business hasn’t generated positive cash flow in the last couple of years, it will be challenging for you to demonstrate your ability to repay a loan, and therefore, difficult for any prospective lender to approve your request.
Fourth, be prepared to offer suitable collateral to support your loan request. Expect that your banker will likely want to obtain an independent valuation of your collateral. Some banks offer larger levels of unsecured loans, but it’s fair to say those loans are more difficult to qualify for.
Finally, over time, your business will benefit if you have the ability to establish a trusting relationship with your banker. To build this trust, you’ll need to be transparent with your finances. Ultimately, your banker should be a strong, vocal advocate for you and your company with the ability to speak to both the strengths and weakness of your businesses. This type of “trusted advisor” relationship is always the most beneficial to both the borrower and the bank, but does take time to develop. Also, don’t be afraid to ask for an introduction to your banker’s manager. He or she could become a valuable asset for you if times get tough.
Taking these five steps will improve your chance of obtaining the loan you need, when you need it. And, if you’re ever denied for a loan, be sure that you understand why. Ask lots of questions. Was the decline primarily due to a lack of cash flow? Were there concerns with the collateral, working capital, or inventory levels? Something else? Your banker should be able to be very specific with you about the reasons your loan request may not have been approved. The more precisely you understand the reasons behind a loan decline, the better you’ll be able to manage your business forward to improve the opportunity to get your next request approved.
Tim Jones is executive vice president and commercial banking regional manager for Umpqua Bank’s Business Banking Division. He can be reached at TimJones@UmpquaBank.com
To find out about personal and small business lending in our area, reach out to your local Umpqua Bank. Store Manager Cory Swank at the Incline Village location can be reached at (775) 284-2360. NMLS#834447