How to Improve Your Chances of Getting a Small Business Loan

Small-business lending hasn’t been the same since the crash of 2008, and like many business owners you may be wondering what you can do to improve your chances of getting the capital you need to grow and maintain your company. There s no shortage of suggestions out there, but we consulted an expert who has insider information. Bill McDermott, founder and CEO of McDermott Financial Solutions, spent three decades working for both national and community banks. Now he owns a business-banking consulting firm and works with business owners to help them get the loans they need.

McDermott: If there has been a slight increase in the approval rate for small-business loans, I’m not sure business owners are really feeling it. I do think a business owner with lower credit and a limited history can get a loan. Bankers lend on the five Cs of credit: character, collateral, cash flow (enough to service the debt), credit, and conditions. If cash flow and credit are weak, then you have to accentuate character, collateral, and conditions.

Commercial banks are probably the best source for getting loans. Large banks typically do cookie cutter-type transactions and rarely make exceptions, but smaller community banks tend to emphasize relationships and are typically more creative in structuring deals. For loans that aren’t bankable at a commercial bank, an asset-based lender that loans against the collateral at much higher rates is a good alternative to banks.

A tactic that is out of the ordinary communicates as risky to a banker. So, understanding and executing the ordinary well is what increases loan approval chances. The ordinary is being profitable, being liquid, not using an excessive amount of debt, and collecting your receivables and turning inventory at a healthy rate.

Yes. Business owners tend to accept what is put in front of them, but what they don’t realize is that everything is potentially negotiable. It’s generally harder to negotiate the credit terms of the deal, but interest rates and fees are almost always negotiable. However, be prepared to trade. If you want a lower rate, try offering more bank deposits or more collateral.

Not being adequately prepared, not providing everything a bank typically asks for, not being specific about the loan request (interest rate, terms, and collateral), and not ensuring that the five Cs are covered.

1. Be sure you are bank ready, meaning you can provide financials that are accurate. This includes an income statement and balance sheet, and also accounts receivables and accounts payable aging reports.

2. You need to be able to provide accurate financial statements not only at year’s end, but also on an interim basis.

3. You can increase your loan approval chances by knowing whether or not your loan is bankable. That can be determined by whether you have enough cash flow to pay back the loan.

4. There needs to be sufficient collateral to fully cover the loan amount after the bank assigns their margin requirement. For example, a bank loans 75 percent of accounts receivable, not 100 percent.

5. Determine if your bank is financially healthy and is actively lending. In this most recent economic downturn, there are many banks open for business, but under regulatory restrictions due to insufficient capital so they aren’t actively lending. The regulatory restrictions are public record and you can find them for your bank by typing the bank name and “regulatory restrictions” into a search engine. If restrictions have been imposed, you’ll find the results in the first couple of pages. If not, you can assume the bank is healthy.

If you could give only one piece of advice to small-business owners looking for a loan in today’s economic climate, what would it be?

Put together a loan package that is thorough and accurate, and make a compelling bank presentation based on the five Cs of credit.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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