Business Loans: They’re Back!

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By Blake DuBose and Mike DuBose

USA Today Business Editor Steven Strauss once wrote, “Cash flow is your business oxygen.” Indeed, business owners need ready access to liquid cash to make payroll for their employees, pay bills, and keep their companies alive. However, many people underestimate how much money is needed to operate their businesses and suffer problems when the bank account registers empty. The best course of action is to seek more money and credit than you think you need before you need it.

For those entrepreneurs who failed to secure adequate credit lines before the recession hit or were stricken with unexpected expenses, it’s been a difficult few years. Despite being the source of 65% of all new jobs in the past 17 years (as reported by the U.S. Small Business Administration), small businesses have found it harder to borrow capital from banks. Stricter lending rules from the federal government have made bankers wary; according to a June 2011 report, 61% who responded to a Pepperdine University poll said they had rejected loans they may have otherwise approved due to pressure from federal regulators.In fact, bankers we interviewed had even declined loans to millionaires because of fierce regulations and applicants’ lack of liquid assets!

The good news is that business loans are finally becoming easier to get. In February 2012, the Wall Street Journal reported that, according to FDIC statistics, “US banks posted their biggest quarterly increase in lending in four years.” This is a positive sign for entrepreneurs and the economy as a whole.

Bankers are still feeling the pressure to “get it right” nearly all the time, though, so obtaining a loan is certainly not guaranteed. Business owners who are seeking loans must be prepared to make a strong case for why they will be able to repay any money they are given. You almost have to prove you don’t need a loan in order to get it!

To promote success when applying for a loan, we suggest taking the following steps:

Improve your credit score: You are entitled to one free credit report each year through AnnualCreditReport.com. Your credit score is the starting point in the banker’s analysis of your financial stability, so make sure that you have a good one or are making efforts to improve.

Develop a banking history: Bankers prefer to lend money to existing customers. First Community Bank president Mike Crapps said, “I encourage business owners to invest in building relationships with bankers in advance of potential borrowing needs. This creates a history of information that will enable bankers to understand the context for loans quicker.”

Bring a business plan: South Carolina BB&T president Mike Brenan suggested that loan-seekers “approach bankers with a detailed, clear strategic plan describing where you want to take your business and steps to get there.” The plan should show lenders that you are taking all necessary steps to make your business profitable (and thus, will be able to repay any money you are lent).

Plans should include a narrative with: personal experience and skills; business history; barriers and problems you will likely face and the solutions to them; competitor analyses; marketing plans; personal and company balance sheets; detailed budget; cash flow projections; SWOT (strengths, weaknesses, opportunities, and threats) analysis; management and ownership structures; and company/personal tax returns and financial statements. Include any attachments necessary to prove the plan’s points, number the pages, and organize the entire document neatly in a three-ring binder. Before you give a copy to the banker, have a technical writer proof all of the materials to ensure that they are clearly written and contain no typos.

Arrange a meeting: When your proposal is ready, call the bank, explain your situation, and ask to schedule an appointment with the best person to speak to for your needs. At larger banks, you may go through a corporate business loan banker instead of the branch officer.

Prepare to meet: Having made nine business loan presentations over the years, we advise you to plan on being grilled! The banker will ask hard questions, but don’t take it personally—his or her job depends on it. Try to anticipate difficult questions that may be posed to you and prepare for them as best you can. A good tactic is to ask others who have gone through this process to coach you and review your materials prior to your presentation.

Rehearse until you feel comfortable. You want to appear poised, relaxed, knowledgeable, competent, and professional. Make notes to ensure that you remember to address all points. Your job is to make bankers feel confident and secure about extending credit to you. State your requested terms during the presentation (e.g., “My business will require a $200,000 loan to be repaid over five years at prime interest.”).

Wrap up the meeting: After bankers have examined your proposal, inquire about the next step in the process. Never rush decisions or act desperate! Small banks have less bureaucracy and will make lending decisions more quickly, but you should still plan on waiting 2-3 weeks for an answer.

Carefully read all offers and contracts to ensure that they accurately reflect whatever agreement you have made. Ideally, you should try to get a line of credit to use when you need cash and pay it down when things are going well. If you must borrow, repay loans promptly. Debt and interest can rob businesses of much-needed profits.

Don’t get discouraged: Even if you feel that you have made a great case, be prepared for rejection. In 2002, to our surprise, a major bank denied us a loan for our Columbia Conference Center. Our family had a 35-year history with the bank, we maintained spotless credit histories, and we were prepared to commit 30% of the building costs in cash. (We obtained funding from a different bank and have paid off that loan.)

Why are some loans denied? According to Crapps and Brenan, the main reasons that banks do not approve business loans are the applicant’s bad credit history; lack of equity and personal assets; limited or no money to contribute toward company operations; poor cash flow projections; overambitious or unrealistic income projections; and expense estimates that are too conservative. “The lack of a secondary source of repayment is a common problem,” noted Crapps. Remember: bankers look for partners in business ventures, not to be the sole funding source.

If you are refused a loan, however, all hope is not lost. Brennan suggested, “Brush yourself off, polish your presentation, and try again!”

The bottom line: When seeking a loan, be prepared!