Know How: Bank On It
What you need before you walk into the bank for a business loan
BY ROBERT ROSEN
Special to the Worcester Business Journal
Banks have to get paid. They can't take big risks in the business loans they make. Because of the typical bank's financial structure, a few bad loans can wipe out their profit for the entire year and then some.
Before you meet with a banker you need to take time to prepare so that you can convince him that you can and will repay the loan.
It's About Cash Flow
In order to make sure the loan is going to get paid, the banker will look to line up sources of repayment and then assess how solid they are and what might happen to interfere with them. He is going to look for the business cash flow that is the primary source of repayment. He is going to look at the collateral that is the secondary source of repayment. And he is going to look at the guarantor who is the third source of repayment.
The first thing you should do before meeting with a banker is get it clear in your own mind how much money you are looking to borrow, what you are going to do with the money, how long you will need to borrow the money, and how you will repay the money. Get it clear and get it in detail.
For example, don't tell the banker you are looking for $100,000 to buy a piece of equipment and you will repay the loan in five years from business income. Tell him the name of the specific piece of equipment and explain that you have shopped around for the best price and value. The more specific you can be, the better off you will be.
Now that you have the request clearly in your mind, get the business financial statements and/or business tax returns for at least the last three years (four or five would be better) and make sure you can explain them to your banker. If you had a bad year in one of the years, be able to explain what happened, why, and what steps you have taken to make it unlikely to happen again. Be able to discuss your balance sheet as well as your income statement. Does your balance sheet show enough liquidity? Does it show too much leverage? And be sure you can discuss the cash flow of your business. After all, the loan will be paid with cash and not accrual basis income.
Similarly, when the banker asks what you can give him for collateral in the event something happens to the company's cash flow, you need to be able to talk with him about collateral in the same kind of detail.
And then, after you've talked about the first two sources of payment, you will most certainly offer your personal guarantee to support the loan. If you're a small business person, it's unlikely the bank will lend you the money without it. Be prepared to give the banker a copy of at least the last year or two of your personal tax returns and a personal balance sheet.
So, remember the old sales adage, "Fail to prepare; prepare to fail," and prepare for the meeting with the banker in advance.
Robert Rosen is a loan officer covering Worcester and Middlesex counties for the Massachusetts Community Development Finance Corp.
He can be reached at rrosen@mcdfc.com.
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