Banker Reveals What It Takes To Get A Business Loan
For millions of entrepreneurs, a simple bank loan would give them the resources (and the breathing room) they need to build and expand their small businesses. As entrepreneurs responded to our “real state of small business” series, they expressed their frustration with banks for not making more loans available. Their responses prompted the BrandMakerNews team to find out what it actually takes to get a business loan.
We interviewed Jonathan V. Reece, Commercial Lender at Geneva Financial, LLC. Mr. Reece gave us a behind the scenes look at the lending process, and revealed insight on how a bank loan can become a realistic option for a small business. We hope you find the interview below as enlightening as we did…
Why are entrepreneurs being denied funding?
Working with hundreds of small businesses during and through this last recession, I think the main reason is that small business owners or SBO’s, both current owners and start-ups, are not being realistic. I have access and have worked with over 250 banks and funding sources in my years as a banker and a broker. There is funding out there for many small businesses as money is definitely beginning to move again in the market.
What does it take to get a business loan these days?
In order to get a business loan, entrepreneurs need to understand the 5 C’s:
Collateral- Probably top on the list and one of the biggest issues for banks right now is collateral. Banks are looking for collateral to secure their position in case of default. Banks need to have secured loans in their portfolio vs. unsecured loans. In the past, many SBO’s have had great access to collateral with rising home prices and commercial real estate being the place to be if you could afford it. What most SBO’s do not realize when they come to a bank is that the bank is NOT going to partner with you in your next venture without being protected. If a bank gives an SBO an unsecured loan, in essence, they are becoming a capital partner in the transaction. If the business fails, then there is no way for the bank or lender to recoup their money. Banks are not in the business of becoming partner with small business. They lend money and expect to get paid back. Then there is the SBA which will guarantee a portion of a loan to small business for any bank, but the SBA still wants the loan to be fully collateralized if possible. I could elaborate much more on the SBA, but will not here. Let me know if you would like more on that.
Character- Next on the list is Character which includes credit. Many SBO’s, as many Americans, have been hit during this last recession and have taken hits to their credit. The credit score is still the most universal way for banks and lenders to determine the creditworthiness of a potential borrowing SBO as well as the interview process. The credit box has indeed gotten smaller and for good reason. Banks and lenders understand and have access to industry actuaries that calculate the likelihood of default for different credit scores. That is why you have to have a good credit score in order to get credit. A good score means you have a history of paying your bills on time.
Capital- Cash is key, king and skin in the game. Gone are the days of 100% finance, at least for the foreseeable future, that was so rampant in the first decade of this century. The question is not only how much are you investing in your own business, but how much will you have left in reserves once your business is open. As an SBO you will need to have your own money in the game too. Once again, the bank is not your business partner; they are lending you money and fully expect to be repaid based on the terms of the loan. The banks know that the more cash the SBO puts into their own business, the more likely they are to do whatever it takes to make that business successful and repay the loans that they acquire. We also realize that the more money you have in reserves, the more likely you are to succeed in your business in case you run into problems.
Capacity- Many SBO’s have experience some bad years in the recent past so they have experienced declining cash flow trends. That is a big red flag when looking at an applicant because this shows the business is steadily declining. Now if the SBO has a very good explanation for the decline, there might be a way to overcome that obstacle. Overall, the capacity of the business, including cash reserves, assets and ability in the marketplace all play a major role in and SBO’s ability to gain credit.
Conditions- This has to do with the type of business you have or are going into as an SBO. This would mean that it is much harder for someone in home building industry or auto manufacturing industry to gain credit due to the conditions that are apparent in that particular industry. Medical is usually a stronger industry and is usually easier to gain access to credit. Make sure you opening a business in a growing industry and not a dying one.
How can entrepreneurs make themselves more attractive to lenders?
Be Knowledgeable- SBO’s need to be very prepared and knowledgeable about their business and about their business plan. Most SBO’s do not even have a business plan, which is surprising. As an SBO, you will make a much better case if you have answers when questions are asked. This lets the lender know that you are on top of your business.
Have Finances In Order- You need to make sure your books are in order and are readily accessible to the lender. Most lenders look at the numbers first and listen to the story to support the numbers. If the numbers are not right, the story doesn’t much matter. Remember, the banker is not your business partner and you cannot get them to lend you money (invest in your business) based on a good story or relationship… or at least you shouldn’t. Know your numbers and why you have those numbers, whether they are projections for a new business or historical projections on what you think your new business will do (be realistic)!!!
Be Realistic- SBO’s need to make sure to be realistic with themselves. If they understand everything I have said above, this will help them with a point of reference to check their level of realty. You owe it to yourself, your vision, your time, your family and the lender to do so.
Should entrepreneurs in the startup phase forget about bank loans as an option–since they are more of a risk and more likely to be denied?
Depending on the 5 C’s of credit above, this will determine whether entrepreneurs have a chance or not in the beginning. They are much more of a risk and they are more likely to be denied, but if they are TRULY REALISTIC based on the information above, then there is money out there.
Thanks to Jonathan Reece for giving us the inside scoop on how to get a bank loan.
Jonathan is a commercial, private equity and residential lending expert with over 15 years of lending experience nationwide. He has owned and operated both large and boutique lending offices doing commercial lending and private equity nationwide along with residential in 25 states. For more information, visit JonathanVReece.com.