The 5 things you should not do when looking for a commercial loan.

BankerI’ve said this before and here it comes again.  The banks are lending money.  Not like they were in the early 2000’s but that’s OK., lending was way over the top back then.

But if you do need a loan, then please put your best foot forward.  That means don’t do any of the following:

  1. DON’T give your banker bad financial statements.  This is the number one reason my banker friends tell me they turn down loans.  The financials are such a mess or they don’t tie out to previous years or tax returns, that the banker has no trust in them.  Loan Denied.
  2. DON’T ask for a loan that does not have good, proper collateral.  You may be a great salesman and have a compelling story but that’s not enough.  Not only are banks somewhat conservative, they also have to follow government lending rules.  That means you have to have collateral for a loan and that collateral has to make sense.  If you are looking for a line of credit to help you through the lean days, you need accounts receivable and/or inventory.  Equipment loans are for purchasing equipment as real estate loans are for purchasing or rehabbing real estate.  If you don’t have collateral, you probably won’t get a loan (though there are some exceptions to this, thanks Barb!).
  3. DON’T browbeat your loan officer.  He is not a sole decision maker, he may not even sit on the loan committee.  You need to get him on your side, believe in your story.  It is the loan officer, not you, that makes the pitch to the loan committee.  If you have abused him or set him up for failure, will he stick his neck out to help you?
  4. DON’T ask for a loan if you don’t need one.  It is surprising how often a client tells me he needs a loan when the reality is he really doesn’t.  Here is a personal story of mine.  I have a client that was very proud of himself because he paid his bills as soon as they came in.  He was very old school and did not want to owe the vendors money.  The trouble was his business was growing which meant the accounts receivable was growing.  That put him in a cash pinch.  I convinced him to move his A/P days outstanding from 3 to 35.  That added $150,000 of cash to his cash flow without needing a loan.  Problem solved.
  5. DON’T ask for a loan where the business does not support the repayment plan.  A commercial loan officer friend of mine said a client came in with a loan request.  “I need to borrow $100,000 and I will pay it back in a year.”  The client had not done the math – his loan payment was $8,500/month but his business cash flow was only $5,000/month.  This fails at so many levels.  The client did not understand the numbers, he didn’t have someone good review the presentation and he didn’t have the cash to pay the loan back.  My buddy, the banker, would not give the client a loan even when the client’s numbers all made sense when changing the term to 3 years.  He lost his confidence in the client.

As a side note, your banker is a good barometer of your business.  Today, if he says no to your loan request, instead of getting mad, schedule a lunch and get his perspective.  Get the reasons for the denial.  There may be takeaways that will help you run your business better.

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