Can You Count On A Bank Loan?ByRaymond D. Matkowsky
When we start a business, we hope for and plan on success. However, that is not always the case. About 80% of new startups go bankrupt within the first five years. There are many reasons for these bankruptcies. Nevertheless, some may never see it coming.
Several years ago, I was a member of a business discussion group conducted over the internet. One member was very disillusioned by the fact that his bank turned him down for a loan. After all his business was profitable and has existed for a number of years. He had a contract and a vendor number with a large international business that was very profitable. How could they turn him down?
Where Is Your Profit Coming From?
It turned out that the majority of his profit came from this one contract. The bank was aware of the danger in this situation. The bank was also aware that this particular organization had a reputation of dropping vendors over cost demands. If my associate lost this account, his business would not be able to pay its bills let alone repay the loan. Needless to say, that this was difficult for my associate to accept. People do not expect rainy days. However, rain is very likely.
Lenders prefer to see many small clients doing business with potential borrowers. If a borrower loses an individual small client, it will not impact the business to the degree a large client would. The fact that one member of my group had most of his business coming from one client was a detriment to his application not an asset as he assumed it would be. I have heard of many businesses finding themselves in such a predicament.
What Do Lenders Want?
First of all, lenders want to be convinced they will be repaid on time. It is up to you to convince them. Interest is the cost of using their money. They are selling access to their money. How do you convince them? You need to understand the lender’s requirements before you approach them. Different lenders may put different emphasis on requirements. You need to understand these differences.
Credit Scores – Lenders want to know how you have managed both business and personal debt in the past.
Annual Revenue – Many lenders require minimum monthly or annual revenue. This will vary from lender to lender. However, they all want to make sure you have enough cash flow to pay your bills and make loan repayments.
Years in Business – Lenders are aware that 80% of businesses fail in their first five years. Typically, you need to be in business for two years and the loan repaid before five years is up. Some online lenders have less stringent requirements.
Industry Size and Competition – Some industries are off-limits to some lenders. Their reasons vary. The competition can be too great or they do not see the industry as viable.
Business Plan - Lenders want to know how you plan on using the money. What are your goals? How will this loan help you reach them?
Collateral - Most important to the lender is repayment. You are only using their money for a given period. Lenders want to be paid back on time. Collateral backs up the loan. If you cannot make your payments, it is an asset they can sell to recoup their money.
Financial Documents – there is a whole list of documents a lender my want. Such as the following:
Income Tax Returns
Business Balance Sheets
Bank Statements
Commercial Lease Agreements
Business Licenses
Articles of Incorporation
Resume showing Management Experience
Anyone of these could be a red flag to lenders. Also, you cannot count on fast underwriting.
Getting a business loan is not an easy task. You may have to visit several lenders before you find one to work with. Remember, they are in the business of lending money. They set the rules and you have to follow them.
If you have any comments, let us know. Email me at rdm@datastats.com. We will try to print it in our next newsletter.
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