The banks are lending. They are even lending commercial real estate development – something near and dear to my heart. But there is a challenge in all of this – the banks don’t want any deal, they want good deals. This is a big change from the early 2000’s and it is probably a better long term strategy. It will make your life more difficult.
I conducted one of my unofficial polls, calling a few of my banker friends. Here is what they said they need and also what you, the business owner, is doing that causes a denial of credit.
Here is what the banker wants:
- Collateral. The number one thing you are doing wrong is trying to get a loan without having proper collateral to support it. Good collateral is:
- o Accounts receivable
- o Inventory
- o Equipment
- o Real Estate
If you don’t have collateral, you will not get a bank loan.
- A reasonable balance sheet. All of you think that the income statement is the all important document. Sales, sales, sales. Not true. The bankers are spending time on your balance sheet. They are looking at your short term assets and short term liabilities (working capital). They want to know if you are taking too much money out of your company (stockholder’s equity). Are your fixed assets in line with your long term debt? All of these things are important to a banker. Here is a question for you: how much do you know about your balance sheet?
- Profits. If you’re losing money, you’re probably not going to be funded. The banker is more interested in keeping the principle safe than he is in making a loan. You need to get to profitable. And while you believe you need the loan to make money, there will be ways that you can self fund yourself to profits. You need to put your thinking cap on.
- Owner’s character. The bankers want to know who you are and how you conduct your personal financial life. Your personal credit report will be heavily weighed – because the bankers believe that you will run your business like you run your life. You need to know what your credit report says and you need to “clean it up” if there are derogatory items. Be proactive.
- You finger on the pulse. The banker will ask you questions to learn how much you know about the day to day management of your business. If you give him the blow off “everything is great” you are going to struggle getting a loan. A banker wants honesty, integrity and he wants you to know your business. If you are doing more than $1.0 million in sales, you need a financial dashboard to help your manage your business and you need to share this with your banker.
Hope this helps. I want you to be successful and getting all these items in good order will really help you.