Tips from a Banker
by Michael Celello
Fewer than 10% of prospective borrowers come to a bank adequately prepared. And bankers haven’t the time to dig for the facts they need. Unfortunately, the safest thing in banking is to say no. You’ll never get fired for that. Want to increase your batting average in the loan office? Here are a few tips:
Pick your bank carefully. Does it deal mostly with larger corporations? Or is it a retail bank, one that aims to serve consumers and smaller businesses? If you pick the wrong one and wind up getting rejected, it will make it that much harder for you to get a loan at a second bank. Banks check credit bureaus, and the bureaus register their inquiries, so the second will know you’ve been to the well already and come back dry. Nobody likes to be asked second. Bankers are always afraid the first one knew something that they don’t.
Have a good accountant prepare a complete set of financial statements for your business, as well as a business plan and a personal balance sheet. If possible, have him accompany you to the bank. The banker will have questions, and the accountant can respond to them more objectively.
Most small businessmen are myopic. They don’t want to pay accountants. They tend to be aggressive optimists with a marketing or sales orientation, so they don’t want to listen to someone they often view as a glorified bookkeeper telling them not to expand too quickly. But an accountant saves the banker a lot of work and shows him that he’s dealing with a sharp businessman—one who knows enough to surround himself with expertise. If you come into the bank with an accountant and all the necessary financial information, it improves your odds of getting a loan by 75%.
If you don’t go to an accountant, you’ll probably settle for a loan with too short a maturity and wind up depleting your working capital. If your business is seasonal, you might fall into a cash-flow bind during slow periods. Then you’ll have to return for refinancing, which may mean another round of up-front commitment fees and higher interest rates. You want to shoot for the maximum term you can get while maintaining profitability.
Make an appointment. Many businessmen don’t seem to realize that you don’t just walk in off the street and ask for $100,000. The businessman who asks for an appointment shows he is business-oriented. You wouldn’t make a sales call without first making an appointment — why do it with your banker?
Demonstrate to your banker that you’re a person of good character, especially if you’re applying for a loan for the first time. A banker likes to know that you’re civic-minded and respected in business and community circles. I have seen banks make loans because they know that the borrower is active in the Boy Scouts and goes to church every Sunday.
Show that you don’t have your head buried in the sand. A lot of businessmen know their business and their immediate community, but they’re often not tuned to what is happening in the world. Pick up The Wall Street Journal and read trade journals so that you’re knowledgeable about your entire industry and the economy as well as your business. Today, even a business that’s been around 100 years can’t be too confident.
Be honest with your banker and ask him for the amount of money you really need. If you want to borrow $20,000 so you’ll have $5,000 for an electronic cash register, $10,000 for a new delivery truck, and another $5,000 for working capital, that’s fine. The bank may want to make three separate loans instead of one, keeping the money for the first two in line with their life expectancies and putting the line of credit in a separate category. Bankers don’t like to lend extra money unnecessarily.
Even the best credit prospects must be prepared to personally guarantee their loans. If a businessman isn’t willing to put his assets on the line, why should a bank? Whether the business is a sole proprietorship, a partnership, or a corporation, it boils down to a few key people at most. Only giant companies like GE or IBM don’t sign personal guarantees.
NOTE: Michael Celello is president of People’s Commercial Bank in East Greenbush, N.Y. (Article first appeared in Inc. magazine.)Information provided by the University of Alabama Small Business Development Center
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